Back to flat on the year. Oof.

Not a disaster. But the reason matters.

The market priced resolution. I’m positioned for recovery amidst chaos. Those are not the same thing. This is why you take down risk when you feel like you are early, so you can save your bullets for when the world starts to price into your conviction.

Quick framing for anyone new. This is my alpha/convexity book, not my absolute return portfolio. As discussed in our last piece, the absolute return portfolio layers this on top of a beta portfolio that’s still under construction. The goal is to provide convexity on top of my diversified beta, with a lean-short bias given I have a lot of illiquid startup equity sitting off-balance-sheet. By summer I’ll tie the two together into something that looks more like a traditional investable portfolio. For now, think of this as half the book sitting against a good diversified set of “all beta.”

The Mistake

I got the macro right and the sequence wrong.

Oil shocks don’t hit all at once. They propagate. Energy to fertilizer to crops to CPI to rates. The market is still trading step one. I’m positioned across steps two through four. That timing mismatch cost me.

Here’s the honest part: as I try to trade at higher frequency and complexity (in part wanting to show process for you kind folks), I’m taking the kind of positions I used to take at Lehman where I would watch them all day. Instead I’m making mistakes in risk, ops, and implementation that account for about half of the drawdown. You could argue these are things that wouldn’t be an issue if I were doing this full time or had help. I hope that’s true, but I need to demonstrate it. Makes me think harder about the timeline to turn back to the Ramble and the portfolio full time. Automation is a sexy buzzword, but right now it’s costing me 10 hours for every hour I save.

The View

I don’t see a Venn diagram where the two sides meet. Trump seems to be getting comfortable either waiting Iran out and doing the rimland strangle (hoping eventually China forces them to the table) or waiting for the Iranians to trip another wire of escalation. The one thing that seems clear is that US stocks want to shrug it off. That was the wrong implementation of my view. Oil and the knock-on effects of Hormuz closing cannot shrug it off.

The US economy looks to be reflating, as do others, though it’s hard to disentangle the inflation component in oil-importing countries (UK for example). That led me to add some cable shorts and a bit of oil upside Sunday night. Given the size of my commods and duration exposure, I’m getting pretty exposed to higher rates and a strong dollar. Bought some cable puts defensively since it covers some dollar exposure and captures the tail of the UK losing control of their rates market, which would pull SONIA up but crush GBP.

The curve is pricing resolution. It’s not pricing recovery. If stocks continue to rip while Hormuz stays closed, eventually bonds will need to sell off as folks price in an inflationary risk on. This would in turn crush many of the hot AI plays which we had on in size before the war. Which is why we remain under allocated and paying theta.

The Book

We’ve taken VaR down to ~1% (around 16% expected annual volatility, down from ~40 in January) along with the increase in uncertainty. This understates our upside volatility though, as we have a lot of embedded convexity in the portfolio.

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I think they don’t know what beta they own.

You see it both ways. Institutions paying for “alpha” that’s just a factor with fees on top. Individuals concentrating into a few names and calling it conviction when it’s really just leverage.

Different paths, same outcome: a portfolio that looks diversified until it isn’t.

That’s the actual problem.

Eagle-eyed readers have reached out to complain that I have a tendency to start series and never finish them. Which, if you're still waiting for Systems 103 or the Campbell builds the AI-investing-machine-god piece from October, is a justified concern. But today we're going deep into the archives to continue a series from 2017 called "Whatever Happened to Alpha?" Partially because we ran a reader poll and portfolio construction won. Partially because I'm thinking about starting my own fund. And partially because after the last couple of weeks — having just missed out on a 10% rally, eye roll — I wanted to spend some time on my beta portfolio.

We tend to slant the alpha book away from having too much levered beta. Call it a hangover from trying to sell institutions a portfolio that would diversify them from their growth-stage tech exposure, or from building my own alpha book to hedge against too much startup equity. Either way, the bias shows up the same way: real diversifying alpha is the most valuable thing in the investable world, and most of what gets sold as alpha isn't that. But for most people, the bulk of the portfolio should be beta anyway. Which is what this piece is actually about.

We’ve talked about beta vs alpha before, but as a refresher: beta is the risk premium you get from holding the market portfolio. Alpha is the return you get by deviating from that portfolio. This piece gets technical, so for those without a lot of time:

A lot of what people call alpha is levered beta. Institutions invest in funds that dress up levered beta as alpha. Individuals, facing leverage constraints, concentrate into high-beta stocks that carry implicit leverage in their business model or balance sheet.

The former is expensive. The latter is dangerous. Retail concentration introduces idiosyncratic risk that increases your road to ruin.

Both would be better served building a basket of diversified betas. What makes up that basket depends on liquidity, risk tolerance, instrument access, and existing exposure. Tech founders should note how much tech is already in their "passive" retirement portfolio. Same principle as oil-state sovereign wealth funds not holding oil.

The funny thing about spending two years building an alpha book is realizing it was defensively shaped by the beta you didn’t know you had.

For retail readers looking for a practical framework: if you're asking this question, you are probably overallocated to alpha. Reorganize to 80-90% beta and 10-20% alpha, at least until you've demonstrated a 0.5 Sharpe (meaning if you're running 16% vol, your excess return over the risk-free rate averages 8%). Below that, put almost everything into beta and focus on earning more to invest.

Three questions to answer about your beta: what volatility can you stomach, what drawdown is unacceptable, and what access do you have to leverage. If your answers are something like 10-12% vol, 25% max drawdown, and not much leverage, you're probably looking at something like Bridgewater's All Weather (ALLW, 85bps) or Advanced Research Risk Parity (RPAR, 50bps). Full disclosure, I used to work at Bridgewater and many of my friends still do. Neither is cheap, but they provide 1.5-2x gross leverage in a set-it-and-forget-it wrapper — which is the part you can't easily replicate yourself at retail scale.

Now for the fun stuff.

You Think You’re Diversified

If you own 40 stocks, you are not diversified. You are long one trade, in 40 slightly different wrappers.

As you add stocks, the idiosyncratic piece dies. What survives is the systematic part. With normal equity parameters (σ ≈ 20%, ρ ≈ 0.3), the marginal benefit of adding a stock drops below noise by about 12-14 names. By 30 it’s a flatline.

The illusion holds when markets are calm. Tech up, energy up, consumer up, each by a different amount, and it looks like you have a bunch of different bets. Then something breaks. Correlations spike. You remember what you were always holding.

What you own, after the math is done, is one thing. Equity beta.

Return vs. Risk

This chart tells you most of what you need to know. Retail portfolios cluster in the bottom left: high volatility, moderate returns, low Sharpe. Institutional portfolios sit further up and to the right: better diversification, better risk-adjusted returns.

Both want to move up and to the right. They get there through different doors.

The Institutional Tradeoff

Institutions have leverage. They don’t need to pay someone to provide it. So the question isn’t “how do I get more exposure?” It’s “how do I get a better Sharpe?”

Hedge fund alpha is real. When we compare the hedge fund index against our “All Beta” portfolio (which just equal weights 100+ macro betas from equity, bond, currency and commodity markets), we find two things, the average fund is around ~50% correlated to their relevant beta (sometimes more) and funds in aggregate have roughly 5% gross alpha (though note the diversification benefit from grouping them into a single portfolio.

But at 2/20, the manager takes about half. Net alpha to the investor is maybe 2.5%. And if that manager is running with a correlation (ρ) = 0.7 to your existing equity book, the marginal contribution to your portfolio’s Sharpe is close to zero. You’re paying for levered beta in a nicer wrapper.

Which brings up an interesting point, for an institution, the manager worth paying for is the one with genuine low correlation. A 0.5 Sharpe at ρ = 0.1 adds more to your portfolio than a 1.0 Sharpe at ρ = 0.8. The marginal contribution scales with correlation as much as with standalone performance.

Which means institutions should actually be more willing to back less proven managers with differentiated books than to write another $250M check to a platform hedge fund running the same equity tilt they already own.

The Retail Tradeoff

Retail doesn’t have leverage. So the entire game changes.

Most retail investors reaching for returns aren’t chasing alpha. They’re trying to synthesize leverage. And they’re doing it through the worst possible door: concentrated high-beta tech, 3x daily-reset ETFs, meme stocks. Instruments that are 90%+ correlated to equity beta, path-dependent, fee-heavy, and designed to decay in exactly the environments they’re supposed to work in.

The right move is counterintuitive. Step one: diversify. Going from 40 correlated stocks to a diversified beta book and your vol drops from 18% to 8%. Your return barely changes. Your Sharpe roughly doubles.

This is the key. This is why folks call diversification ‘the only free lunch in investing.'“

Step two: lever. You end up back at 16% vol, but now you’re on the 0.65 Sharpe line instead of the 0.3. Same risk. Fifty percent more expected return.

Now, this also explains WHY retail does what they do. Usually, they lack good sources of leverage. Be it from restrictive / protective brokers, or retirement accounts where it is verboten. Pushing people into more esoteric, difficult to manage instruments like futures, and options.

This is why 3x levered ETFs exist, this why folks blow themselves up on meme stocks. Because the leverage constraints forces upon retail push them into more and more dangerous, confusing or expensive ways to play with leverage.

The All Beta Portfolio

Here’s where this gets concrete. Back in 2017, we built a macro beta portfolio. Twelve asset classes, full correlation matrix, equal-risk-contribution weights. We’ve kept it updated since.

A “beta for dummies” (like me) ETF version tracks the futures version closely. Which means for most people, you can build something very close to this with a handful of cheap ETFs.

Going from a bad beta portfolio to a decent one is where most of the value lives. Going from decent to perfect is small, uncertain, and requires judgment you should probably deploy elsewhere.

The Regime Problem

One caveat. The All Beta portfolio, like all risk-parity type strategies, has benefited enormously from the 40-year decline in interest rates. Bonds diversify equities in a disinflationary regime. We’ve argued since 2020 that this regime is shifting. Conflict is inflationary. In that world, bonds and equities correlate positively (2022 was the preview), and the traditional bond allocation has to shrink. Gold and commodities become the diversifiers.

It also means if you tried using the relationship between the blue line (bonds vs trend) and the red line (all beta returns) above to trade beta returns, you would have had a really good time up until we saw a resurgence in inflation in 2021.

Your beta portfolio is a function of the regime you’re in. Which is the first moment where what you call “beta” starts quietly becoming something else. Which calls back to one of the first conversations I had with the big man, way back in 2012. “If everyone listens to you about your optimal beta portfolio, doesn’t that to a reallocation in assets that pushes up your portfolio? Does that give your beta portfolio alpha exposure?”

Anyway, five years layer, that chart above was the start of the work that led us to start increasing our gold allocation to dangerous levels, and to advocating in 2017 to both individuals and institutions to try “stocks and gold” vs “stocks and bonds.”

That being said, Gold is the position I’m most conflicted about right now. Strategic view says this regime wants more gold, not less. Tactical read right now says the opposite: flows are crowded, gold is trading more like a bond than a diversifier, the negative correlation to oil keeps surprising me. I’m running gold heavier than the ETF book below would suggest, but I’m watching it closely. More on this in a later piece when we revisit our gold view.

How Much Beta Is in the Alpha?

Scale this up and most of the “alternative” universe collapses. PE is levered equity with a smoothing lag. Most hedge fund strategies are levered factor tilts available in an ETF for 15bps. Private credit is levered corporate bond beta with an illiquidity premium.

Standard error on a Sharpe ratio is roughly 1/√T. A one-year track with an observed Sharpe of 1.0 has a 95% confidence interval from zero to 2.0. So, you really need quite a bit of time to really understand if someone is good at this whole money management thing.

Where This Leaves You

If you’re running a meaningful chunk of your book in active picks, there’s an implicit claim in that decision. You’re claiming the residual after you regress against your beta book is real and persistent.

If you haven’t measured it, you don’t know what it is.

I spend most of my time here writing about the alpha book. The part of the portfolio that’s actually working right now is the beta book. The alpha book was shaped, for two years, by whatever the beta book was doing and the exposures I had in my life.

Most portfolios don’t fail because they were wrong. They fail because they were one bet pretending to be many.

Next time: the zany math and the professional-grade implementation. Residual Sharpe decomposition, Bayesian shrinkage on short track records, the leverage multiplier that makes Sharpe the only variable that matters, and a head-to-head backtest of four beta constructions — pure equal-risk-contribution, synthetic All Weather, leverage-constrained retail (RSSB-style), and futures-overlay institutional — with realized Sharpes, 2022 drawdowns, and the real cost difference between the retail and institutional paths. Bring a calculator. Subscribers get it first.

Building the Book

For those who want an actionable implementation in the meantime. With the huge caveat that I don’t know, man. I’m spending a lot of time in my alpha book trying to hedge or short stocks and I’m this close to putting on a big steepener (selling inflation-sensitive long-term bonds to buy growth-sensitive short-term bonds). So you probably want to wait until we see another 10% drawdown here before yoloing in. Yes, you can be mad at me for not telling you this a couple of weeks ago, and that would be fair, but this is how we do that. It’s exactly that gap that reminded me to write this piece.

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Whether or not it’s working is up in the air. Crude is up 40% since the strait closed, but down ~5% since Trump’s blockade was announced. In response Iran threatened to close Bab el-Mandeb alongside Hormuz. Both chokepoints now at risk. VLCCs too large for Suez to carry oil at full weight. And yet, rumours that Iran was willing to bench on uranium enrichment, the key issue blocking any medium term solution. Stocks rallied. The market has priced the first order impact on energy and growth, whether or not appropriately, the assets move with the headlines.

What the market has not priced in is the second node in the chain. Or the third.

This article is about those nodes.

There’s this joke I post on Twitter every now and then, when one of my deep out-of-the-money calls hits.

“My hyperstitions usually take 6-18 months.”

Hyperstition being one of those SF/AI-speak words for NYC/Soros’s reflexivity. A prediction which becomes more true in the act of making it. The idea that making a call publicly sometimes influences the outcome. Markets work this way directly. You lift an offer, the price moves, other people react. Classic examples being Soros breaking the Bank of England or the market ganging up on LTCM.

I’m bringing this up because when I look at my best trades/hyperstitions, they come in two forms. The first is fast synthesis under pressure. Over the past few weeks there have been moments where a speech or news item hit the tape and I made 20-50bps by synthesizing quicker than the market. Trump’s speech where he opened with the length of WWI and Vietnam and then said “32 days”, he wasn’t about to say “and I’m OUT.” That kind of punting is real but it’s not scalable. You end up hitting 2/3rds, but the opportunities come almost at random, and you have to be glued to the screens to capture them. Plus, there are only so many Druckenmillers, and markets are more efficient than in his day so it’s hard work and not something you are going to retire on.

It also didn’t quite cover my theta bill, which is growing.

The second form is the one I hang my hat on. Looking at a chaotic, ambiguous system and identifying what idea or event is just outside the Overton window and about to come into frame. Which then results in a radical repricing. Gold in China from 2018. Silver from 2023. AI infrastructure from 2023. Rare earths in ‘24. All of them looked picked over or fundamentally unpopular when we started building positions. All of them took 6-18 months to reprice.

The cascade trade is this second form. The damage is locking in now, on biological and chemical timelines the market doesn’t track. The repricing comes later. The longer the heart attack in Hormuz lasts, the greater the repricing.

Quick update on the book before we get to the meat.

Credit short has been a waste of premium. We had an opportunity to capture gamma when it dipped below our strike, but late on the trigger meant we missed the move before headlines ripped through the top strike (I really need a trader to run all this stuff while I’m in meetings and traveling but again, no crying in the casino Campbell).

Lesson learned: when you’re trading credit via puts on actual bonds (HYG), your duration hedge gets messy. As the corporate bonds fall through your first strike, you pick up a lot of delta (which also means duration), and then if the risk-free rate compresses on growth fears your puts lose even if spreads are unchanged. I rolled the short exposure into May SPX put spreads, 1.5-4% out of the money. CDS remain the right instrument for this leg. We’ll get there, someday. Even if it means building an ISDA scale book brick by brick with newsletter subs (kidding).

VIX calls from Friday worked, for a little while and ended down on the day . I bought them expecting the fragile peace to break. What I didn’t expect was Trump taking my advice and counter-escalating to a full naval blockade so effectively that Iran came back to the table and began caving on enrichment. To me this is a real line in the sand that I am looking for to shift my peace balance. It’s also why stocks are rallying into what could be a radical escalation. I took off around 1% of crude call spreads after the news, down 15% from the daily highs, but still up on the trade.

Couple surprises in one day and the book still had a fine session, mostly bailed out by the rates and equity book (long AI equities, critical minerals, and energy exporters). The US equity market is either a monster or entirely delusional. Probably both.

Gold is trading terribly. Correlated with stocks, underperforming on the squeeze. Heavy. The Turkey/Middle East deleveraging from last month is still spooking people. But longer term, if Iran is demanding toll payments in yuan and crypto, this has to be constructive for gold. I’m getting more bullish, not less. Slowly moving out of delta one and into long-dated call spreads and flies. If we do get peace here, I’ll probably stick 5% of the book in long-dated broken butterflies and just stop watching it. IF you have friends looking to launch a gold-backed stablecoin, I’m in.

Which brings us to our ‘cascade positions’: our calls are underwater, down about 1% combined across a set of strikes and contracts. We’re early. And we added winter wheat futures after doing a ton of vol work which convinced me to puke the vol and just buy delta. Seems to use the wheat wheat market is looking at a chart that includes actual supply destruction from Ukraine in 2022 and pricing implied vol /skew way too high relative to what the current setup justifies. More on this below (maybe more than you want).

In terms of the outlook.

We continue to stand at the edge of war and peace. Today brought moves that suggest we may actually be close to some sort of resolution. We still want a portfolio that is balanced to both outcomes.

If Iran folds on enrichment, there are real odds Trump walks, claims victory, and pivots to stimulating the economy ahead of midterms. Venezuelan regime change, Iranian nuclear deal, Indonesian security deal, revitalized the Abraham Accords. Forcing the difficult conversation on NATO and heading into the USMCA review this summer with a very aggressive posture (watch out Canada, it’s going to hurt). There’s an argument to American voters that the sacrifices were worth it. The counter-blockade could be another “Leave the Bride at the Altar” (Stage 5 in the maximum pressure playbook) designed to extract last-minute concessions.

On the other hand, military assets are still moving into the region. Lebanon is unresolved. We don’t know who’s actually in charge in Tehran or what they’re willing to accept. China would clearly prefer the US get tied up in the heartland, but maybe by subjecting them to the same pain as Europe and the rest of Asia (and deepening their economic pain from property which appears never-ending), we can bring them to the table. Remember where all this military kit is coming from after.

Which brings us to the trade structure. We want a portfolio that is balance to peace and war.

For peace: UK SONIA short rates. The UK is the most energy-import-sensitive major economy. If this resolves, oil falls back to $70, inflation expectations collapse, and the Bank of England cuts aggressively. SONIA Mar'27 futures are pricing that world at maybe 30% probability. We think peace odds are higher than that. The position has already paid us on the ceasefire rally, and if Iran folds on enrichment it likely pays enough to cover the grain book's losses in full. That's the portfolio construction: SONIA profits on peace, grains profit on war, and the calendar grinds in our favor either way. See our prior write up and Jason’s substack for this idea in depth. A lot of people will just yolo stonks here (and clearly already have - stocks are back at the highs!) but we want an expression with some more convexity to the upside.

For war: enter the grains. Add if things deteriorate. Every day the strait is closed and energy remains elevated, the combination of supply destruction and demand pressure is building, currently hidden by markets that are in supply glut for the short term. Exactly the kind of trades I specialize in. Early, but explosive.

The cascade thesis doesn’t require the worst case. It requires the calendar to keep running while the market prices the first node and ignores the second. Even in the most optimistic scenario, Hormuz will take time to normalize. Energy prices will remain elevated for months, not weeks. The flow-through to fertilizer prices has already happened and won’t reverse on a handshake. High diesel at $5.98/gallon leads to abandoned marginal fields. Ethanol economics pull corn off the food market to supplement refined products. That’s the inherent convexity here, and why I probably want to continue to own these even if we do get peace in the next couple of weeks (after our gains in SONIA offset the likely losses in these positions).

The Three Commodities

Three crops, three mechanisms, one blockade. Each has a gate. A calendar window where the damage locks in permanently. Sugar's gate is the ‘crush allocation’ (choice between sugar for your car vs sugar for your tea), opening now. Wheat's gate is the middle east demand bid, already open and kicking in earnest in the next month. Corn's gates are stacked: acreage, pre-plant, sidedress, each closing in sequence through June.

Sugar is the most direct link. Sugarcane is one crop that becomes two products: sugar crystals or ethanol. Brazilian mills decide at crush time. The Centre-South crush started April 1. At $110+ Brent, ethanol is more profitable than sugar at the mill gate. Allocation shifts. The 11.2 million metric tonne global surplus starts shrinking in real time. UNICA fortnightly crush data starting reporting in late April and gives us near-real-time confirmation. Swap dealers are net long 157,000 contracts, near the highest since 2008. Managed money is pressing short at 56,000 contracts against them. The physical end users see something the specs don’t. The self-correcting feedback (mills shift back if sugar rallies above 18-19 cents) caps the move, which means the trade is 14 to 20, not 14 to 30. We remain long sugar call spreads.

Wheat is the cleanest setup because it doesn’t need a perpetual blockade to work. Winter wheat opened the season at 35% good-to-excellent, worst since 2022. Oklahoma 54% poor-to-very-poor. Planted acres are the smallest since 1919. That’s a domestic supply problem that exists if the strait reopens tomorrow. Hormuz adds the demand side: MENA food security buying is a political imperative, not a discretionary purchase. Bread prices are regime risk. Egypt, Algeria, Iraq don’t cut wheat imports because prices rose 20%. They panic-buy. KC HRW implied vol at 25.6% against 24.7% realized is basically fair, though skew is intense. The market is not pricing a panic bid into the smallest US wheat crop in a century during a naval blockade. We added winter wheat futures (after rolling out of our calls last week, which I’ll walk through in the vol section below).

Corn has the biggest buffer and the longest fuse. Record production at 17 billion bushels, ending stocks at 2,127 million. The cascade changes the math through farmer decisions at specific calendar gates, each one permanent once the window shuts. Pre-plant nitrogen (happening now, 40% buying at $924 spot). Acreage allocation (June 30 reveal). Sidedress nitrogen (the binary gate in June, where 15-20 million acres either get their top-up or don’t, forever, after V8 around June 22). The corn trade needs the blockade to persist through sidedress AND the July WASDE reports to revise yields. Three gates, sequential, uncertain. We hold longer term (fall/winter) calls but the catalysts are closer and the mechanisms more direct in the other two.

Over 21 million tonnes per year of nitrogen capacity is now physically offline, destroyed, or export-blocked. QAFCO in Qatar, 5.6 million tonnes, hit by strikes, 3-5 year repair timeline. Yara Pilbara in Australia dark until late May. Nutrien Trinidad idle since October. India shuttering plants as Qatar’s LNG stops flowing. China blocking exports. And Nutrien’s Lima, Ohio plant about to go offline for a 72-day turnaround in August through October.

The supply isn’t delayed. It’s gone. The calendar keeps running.

What follows is the deep dive. Commodity by commodity, the supply and demand picture, scenario models across three blockade durations (one month, three months, twelve months), the vol work, the positioning, and the specific trades.

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The tension we laid out last Wednesday has proved irreconcilable.

Iran wants nukes and control over the Strait. Trump cannot allow either. The two circles of the Venn diagram sit far enough apart that Israel’s war on Lebanon didn’t even make the agenda.

I won’t claim I called this perfectly, but we may finally be in the mid-game. This isn’t something that gets called off in an afternoon. The question is fundamental: who controls the most important waterway in the world, and does Iran’s willingness to threaten its neighbors give it enough leverage to negotiate its way to a nuclear weapon?

That’s the crux.

What’s becoming clear is the strategy. And for those who’ve been reading along, from “War for the Dollar“ through “Don’t Take the Bait“ through “Waking the Hegemon“ and “The Fragile Peace,” the pattern should be recognizable by now.

Trump is running the Rimland playbook.

Interdict the ships. Threaten 50% tariffs on anyone supplying weapons to Iran. Bring China into the conversation not by invading the heartland, but by controlling the water their energy flows through. For every ship they mine, for every tanker they hit, seize a ten of theirs. Park the carriers, commandeer the tankers, sell their crude. In dollars.

And then the Abraham Accords. Saudi oil flowing through Jordan to Haifa. The Tapline reborn. A physical corridor connecting the coastal states into an energy network that bypasses the heartland entirely. Rimland coalition infrastructure built in pipe and steel. By my account, the reason we are in this mess (Iran/China acting via Hamas on October 7th to trigger Israel and derail the normalization of relations which would then provide alternative routes for trade outside of Hormuz/BRI).

This helps explain the gap between Washington and Brussels. The US feels the weight of responsibility. Europe appears to believe it can cut side deals for its energy while the younger brother fights its battles. France blocked the UNSC resolution, negotiated bilateral passage through the Strait, and called for a “coalition of independents.” Classic heartland thinking: cut a deal with the interior, avoid the fight, pretend the sea lanes maintain themselves.

Trump just closed that loophole. And in doing so, made America’s problem the world’s.

As of writing, crude is back up 6%+, stocks are down 1%, and the ceasefire gains from last week look extremely likely to unravel. I bot some VIX calls late last week, so call me biased.

How much depends on a series of first-order questions about how far this escalation goes:

• Can the ceasefire hold for another week, or does backward induction lead to resumption?

• Trump has promised to interdict ships that paid Iranian tolls. Does that include Chinese vessels? What happens when they try to pick up crude from Kharg?

• He’s also reiterated the 50% tariff threat on any country supplying weapons to Iran. Is the trade war back on the menu?

Then there’s the counter-move. Iran activates the Houthis, who still appear capable of making Bab el-Mandeb impassable. Worth noting: the majority of tankers lifting Saudi barrels from the East-West pipeline are VLCCs too large for Suez. A Houthi escalation doesn’t just threaten Red Sea traffic. It forces the long route on the biggest ships carrying the most critical barrels.

The through-line is that this conflict continues to grow in scale and scope. By widening to a total interdiction of toll-paying ships and reiterating tariffs, Trump has brought China squarely into the conversation. Beijing has been stockpiling crude for years for exactly this scenario. But given the economic drag from the property hangover, how long can Chinese markets stay sanguine? How likely are they to escalate to defend their energy supplies? The sequencing — Venezuela, then Iran — looks increasingly strategic.

Rimland returns.

The second-order market questions follow directly:

• How bad is Monday morning? The first leg down was fast money and retail put buying. At what point do real money investors decide the vol is unmanageable and puke, or hit risk limits?

• Last week saw hedge fund pods rush back into long AI hardware, short software. As oil rallies, bonds sell off, tightening liquidity. Combined with supply chain risks around Gulf helium, a critical input in chip fabrication. Is this enough to force a reprice of the AI acceleration timeline?

• US growth was basically flat in Q1 going into the conflict. As energy prices surge, disposable income gets pulled into gasoline, heating, jet fuel. Will households cut spending or lever up?

• The Fed minutes revealed the board is already discussing tightening to contain the inflationary impact of higher energy. Expect a fresh round of debate about the appropriate response to a negative supply shock. Can the Fed “look through” an energy shock of this magnitude?

All of which brings us to the cascade. The rimland strategy addresses energy and the dollar. It does not address what energy feeds. The market is pricing the first node. It has not yet connected the second. Oil reprices on headlines. Agricultural calendars don’t. Urea is still at $700. The USDA’s smallest planned wheat crop since 1919 doesn’t reverse because two diplomats shook hands. Farmers who couldn’t afford fertilizer in March aren’t retroactively applying it in April.

Tomorrow we go deep on ags. The supply and demand picture, what’s already baked in, and where the market is still mispricing the cascade.

Disclaimers

Charts and graphs included in these materials are intended for educational purposes only and should not function as the sole basis for any investment decision.

These opinions are mine and mine alone and do not represent the views of any of Rose’s clients or counter parties.

The Ramble does take positions in various assets we write about, and views are subject to change without notice.

This letter does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by Rose, Campbell or any other third party regardless of whether such security, product or service is referenced in this brochure. Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

THERE CAN BE NO ASSURANCE THAT ROSE TECHNOLOGY INVESTMENT OBJECTIVES WILL BE ACHIEVED OR THE INVESTMENT STRATEGIES WILL BE SUCCESSFUL. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN INVESTMENT IN A FUND MANAGED BY ROSE INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE RISK THAT THE ENTIRE AMOUNT INVESTED IS LOST. INTERESTED PROSPECTS MUST REFER TO A FUND’S CONFIDENTIAL OFFERING MEMORANDUM FOR A DISCUSSION OF ‘CERTAIN RISK FACTORS’ AND OTHER IMPORTANT INFORMATION

He was not a lone wolf. He was an active member of PauseAI with six community roles. His Discord handle was "Butlerian Jihadist." His Instagram was a feed of doomer content: capability curves captioned "if we do nothing very soon we will die," Venn diagrams placing us at the intersection of The Matrix, Terminator, and Idiocracy. Four months before the attack, he recommended Yudkowsky and Soares' If Anyone Builds It, Everyone Dies to his followers.

His name is Daniel Moreno-Gama.

He had his own Substack. In January he published “AI Existential Risk,” estimating the probability of AI-caused extinction as “nearly certain.” He called the technology “an active threat against anyone who is using it and especially towards the people building it.” He concluded: “We must deal with the threat first and ask questions later.” He wrote a poem imagining the children of AI developers dying, asking their parents why they did nothing. “May Hell be kind to such a vile creature,” he wrote about the builders.

PauseAI has already deleted his messages from their Discord.

For an investing newsletter, I know this is not what most of you are here for. The goal here is to to explain where my worldview is coming from, so that the longer term calls start to make more sense. My ideas behind the “New New Deal” are intended as a direct response to where this is going.

All I am doing here is running their model forward, and connecting the dots.

Here is the framework. It has three moving parts.

Start with certainty. Yudkowsky’s position is that if anyone builds sufficiently intelligent AI, every human being on earth dies. Not probably. Not maybe. Everyone. Your children. His daughter Nina, whom he invokes by name. He published this in TIME. He wrote it in a book called If Anyone Builds It, Everyone Dies. He said we should airstrike data centers, and that the risk of nuclear exchange is preferable to a training run completing.

Purity spiral aka escalation. Within this community, members compete to demonstrate commitment by raising the stakes. P(doom) numbers climb from 50% to 90% to 99.99999%. The Center for AI Safety's national spokesperson said on camera that the correct response is to "walk to the labs across the country and burn them down." PauseAI activated something called a "Warning Shot Protocol" declaring an AI model "a weapon of mass destruction." One of PauseAI's leaders said an Anthropic researcher "deserves whatever is coming to her." When someone flagged this rhetoric in PauseAI's Discord, the mods deleted the post.

The day before the attack, Nate Soares, Yudkowsky's co-author on the very book the kid recommended, tweeted that Altman was "doing terrible stuff."

Then cheap talk gets tested. Game theorists have a term for this: cheap talk is costless signaling that eventually meets reality. When you make the stakes existential for the human race, you can justify any level of extremism if it lowers the hallowed p(doom). These aren't isolated incidents. They are a series of escalating and mutually reinforcing claims around an eschatological philosophy that, taken to its conclusion, would accept killing 99% of the world to save the last 1%.

It was only a matter of time before someone took the framework at face value. The kid read the book. He joined the community. He wrote his own manifesto. In a memoir for his community college English class, he described himself as a consequentialist: “I give very little credence to intentions if the results do not match.” He chose “Butlerian Jihadist” as his name. On December 3rd he wrote in PauseAI’s Discord: “We are close to midnight it’s time to actually act.”

Then he acted.

They gave him a trolley problem. One life versus all of humanity. The kid pulled the lever.

There is a final irony that deserves attention. If the doomers truly hold their stated beliefs at their stated confidence levels, they should be more honest about what those beliefs imply. A few weeks before the attack, a journalist asked Yudkowsky: if AI is so dangerous, why aren't you attacking data centers? His answer, relayed by Soares: "If you saw a headline saying I'd done that, would you say, 'wow, AI has been stopped, we're safe'? If not, you already know it wouldn't be effective."

Notice what that answer is not. It is not “because violence is wrong.” It is “because it wouldn’t work yet.” The restraint is strategic, not moral. And the community knows it. The dark undercurrent is an unspoken agreement: the kid’s greatest sin was bad timing.

This is what I mean by intelligence not equaling power, and it is the deepest flaw in the entire doomer worldview.

Yudkowsky’s framework rests on the conflation: a sufficiently intelligent AI will necessarily acquire the power to destroy humanity because intelligence converts automatically into capability. Most of his followers are not technical. They do not build AI systems or work on alignment engineering. They possess a particular kind of verbal intelligence that lets them construct elaborate arguments about risk, and they have convinced themselves this entitles them to a priestly authority over the technology. They can construct the argument. They cannot build the system.

This isn’t accidental. It’s baked into the foundational texts. Yudkowsky’s Harry Potter and the Methods of Rationality literally models a world where the person who reasons best deserves to override every institution around him. The Sequences build the liturgy: a small caste of correct thinkers, epistemically and morally superior, whose rationality entitles them to govern what the rest of humanity is allowed to build. It’s not a safety movement. It’s a priesthood with an origin story written in fanfiction.

Yudkowsky can distance himself from the kid with the Molotov. But he cannot distance himself from the syllogism. If the builders are going to kill everyone, stopping the builders is self-defense. That is the central claim, stated plainly. The only question was always when someone would take it at face value.

They should stop acting surprised when their own logic shows up at 3:45 AM with a bottle full of gasoline.

Disclaimers

I am not advocating for or against any position on AI safety. I am observing that a framework built on certainty of extinction produces predictable consequences. The suspect is innocent until proven guilty.

These views do not represent those of any investors, clients or affiliates of Rose.

Ceasefire.

Rally.

I was working late on the day gig, only to come back to the screens to a flood of green. Stocks up. Bonds up. Gold up.

Yuan...up.

The market decided: done deal.

The problem, which became clear to us more over the ensuing day: no one could say what the deal actually was.

If you read what each side was claiming, it wasn’t clear which 10-point plan they had agreed to.

Iran’s 10-point plan includes continued enrichment. Trump posted this morning: “There will be no enrichment of Uranium.”

Iran says passage through Hormuz will be possible “via coordination with Iran’s Armed Forces and with due consideration of technical limitations.” Trump says the strait is “totally clear.”

Pakistan’s PM announced the ceasefire applies “everywhere including Lebanon and elsewhere, EFFECTIVE IMMEDIATELY.” Netanyahu said it doesn’t include Lebanon and launched the largest coordinated strike on the country since the war began. On the same day.

Thing is, some of those contradictions are bigger than others. Some of them seem like they might be “dealbreakers,” as they say.

At least one side is claiming a victory that isn’t real. The market priced the version where both sides are right. That’s the mistake.

Coming into the deadline, the positions were clear enough. Trump wanted dismantlement: enrichment gone, stockpiles neutralized, the nuclear question closed permanently. Iran wanted normalization: keep enrichment, control the strait, end the war on terms that look like victory.

There was actually space in the Venn diagram.

Neither nation had actually ratified UNCLOS, the UN convention that prohibits tolling international waterways. You could imagine a world where Trump lets Iran claim some version of strait sovereignty in exchange for the thing he actually cares about, and both sides walk away with something to sell at home.

For Trump: “No one else helped us contest Iran’s nuclear ambitions. The UN is feckless. The Europeans who need this oil refused to fight for it. Not our problem if Iran and Oman call these territorial waters, in exchange for NO NUKES.”

For Iran: “We fought off the Great Satan, we kept our position, we control the waterway.” (Even though they tried to make clear recently this applied to the government and not the people of the US. OK sure, then stop financing terrorism.)

For the GCC: a bitter pill, but hey, at least the shooting stops.

For Israel: a deeply suboptimal regional outcome, but globally one we could jam down their throat, as the likely target of any nuclear ambition from Iran.

That overlapping Venn is what the market bought.

The enrichment chart shows why that Venn only works in one configuration.

Iran has roughly 440kg enriched to 60%. That’s 99% of the work to weapons-grade and about 4-5 weeks from a bomb. It’s pretty inconceivable that they would not only be allowed to continue enriching but keep their stockpile of 60% highly enriched uranium (HEU). 20% HEU is defensible for civilian nuclear uses, the only reason you go past there is to get nukes, and by the time you are at 60%, you are 99% of the way there.

If Trump gets full denuclearization — stockpile surrendered, Natanz and Fordow dismantled, enrichment ended — then you could imagine letting Iran claim some version of strait sovereignty. Ugly for the GCC, ugly for Europe, but defensible. The Venn diagram holds.

But if Iran keeps enrichment, which their 10-point plan explicitly demands, then you cannot also give them the strait. A nuclear-capable Iran with a toll booth on 20% of the world’s oil is not a concession. It’s capitulation. You can trade one for the other. You can’t keep both.

That’s where the diagram breaks.

And right now Iran is claiming both.

Then the seams appeared.

Iranian missiles hitting Gulf states on the morning of the ceasefire. Bahrain, Kuwait, the UAE all reporting fresh attacks. Iran bombing the Saudi East-West pipeline, the one piece of infrastructure the Saudis had been using to route oil around Hormuz to the Red Sea port of Yanbu. A parting gift: good luck with your Plan B.

Then tears in the fabric.

Iranian attestations that an end to the conflict in Lebanon WAS part of the deal. Trump and Vance saying it wasn’t. Israel proving the point by bombing Beirut, Tyre, and the southern suburbs while the ink was still wet.

Trump saying “the strait is totally clear” while Iranian VHF controllers broadcast to ships: “vessels transiting without permission will be destroyed.”

Then the data.

Zero oil tankers. Four dry cargo ships. Remember the folks on those boats, and the insurance companies behind them don’t live in the world of promises. They have to live with the downsides from ambiguity made real.

And then, late in the day, Iranian media reporting that Pakistan had handed each side a different version of the deal.

Not two interpretations of one deal. Two different deals. Which isn’t the biggest deal if the principles are notionally bought in, which is what the market seems to think. But what if the differences aren’t really something you can still paper over.

Oil executives already pushing back on the toll: “We didn’t have to do that before. I thought we won the war.”

US officials announcing thousands of marines and ground forces will continue deploying to the Middle East. Despite the ceasefire.

The market held on to the consensus that if both sides WANT a deal, one would be reached. Maybe. But peace without capitulation requires both sides to claim victory. That works when the claims are cosmetic. It breaks when they touch physical reality.

You cannot simultaneously have enrichment and no enrichment, a controlled strait and a free strait, Lebanon included and Lebanon excluded. These are states of the world. Only one can be true. And when that resolves, it won’t resolve quietly.

Wars don’t end because people are tired of fighting. They end when the ego of the belligerents is resolved. Sometimes it’s literally about the scrap of earth, but more often it’s about why a scrap of earth leads to the mobilization of men. It’s the ego of saying: you cannot enforce your will on me.

Both sides still have that. Very real material concerns outstanding: nukes, enrichment, who controls the strait, what currency people pay for their oil in. And ego: who gets to claim victory, who gets to shape the region as a result.

Both sides are claiming victory right now. Those claims are mutually exclusive.

Meanwhile, every day the clock ticks, the physical damage compounds.

This is what the oil curve is actually showing you.

The curve has been in extreme backwardation since Hormuz closed. Front month screaming tight, back months pricing normalization. The ceasefire hit and the front dropped $17. The clock got faster.

But backwardation isn't just a price signal. It's a physical process.

As opposed to purely financial securities like stocks, the commodity futures curve represents the balance between physical buyers and physical sellers across time.

When the front trades above the back, holders of inventory are being pulled to sell today rather than store for tomorrow. Every day in backwardation, the system gets thinner. Barrels come out of tanks, buffers shrink, spare capacity drains. The clock isn't just ticking toward resolution. It's ticking toward depletion. Peace on day 14 of this ceasefire starts from a worse position than peace on day 1, even with zero additional damage. And when inventories hit the floor, prices stop being linear. That's when the math breaks.

But the clock only runs one direction. It can price resolution faster. It cannot undo what’s already been destroyed.

Ras Laffan, the world’s largest LNG export facility, took drone strikes that knocked 17% of Qatar’s export capacity offline. Repair timeline: three to five years.

The Saudi East-West pipeline was hit hours before the deal. Main pressurization and pumping station likely damaged. Yanbu flows limited. That was the Plan B.

Israel struck the Xinjiang-Iran railway corridor at Kashan, China’s terrestrial alternative for trading crude oil while avoiding Hormuz. First direct attack on Chinese infrastructure in the war.

Bob Elliott’s chart puts it plainly: to get meaningful relief in oil prices, Hormuz can’t just be open to some ships. It needs at least 10 million barrels per day passing through, at least 50% of pre-war capacity. Even with every theoretical offset firing, there’s still a 6 million barrel per day gap.

Every compressor station, refinery, terminal, and loading facility hit in the last 40 days sits on an industrial timeline, not a diplomatic one.

Diplomats negotiate in days. Markets price in weeks. Infrastructure operates on years.

The curve is pricing resolution. It is not pricing recovery. The gap between those two timelines is where we are.

And the cascade hasn’t paused for the ceasefire.

Crude got smoked. Corn barely moved. That’s the cascade in one chart. Oil reprices on headlines. Agricultural calendars don’t. Urea is still at $700. The USDA’s smallest planned wheat crop since 1919 doesn’t reverse because two diplomats shook hands. Farmers who couldn’t afford fertilizer in March aren’t retroactively applying it in April because someone in Islamabad said “ceasefire.”

What We Did

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Hegemonia: leadership earned by bearing the cost.

Arkhe: control imposed by force.

The distance between them is measured in how allies behave when the bill arrives.

Globalism is dead.

Not dying and in need of a blood transfusion. Already passed, we just haven’t booked the funeral.

The irony, which may take a generation to metabolize, is that the very things the world attacked America for, the military bases, the aircraft carriers parked next door, the nuclear umbrella, the arrogance of thinking it was our job to police the sea lanes, the dominance of the dollar and the financial system behind it, were the very things that made globalism work.

Free markets. Free movement of goods. The promise that you didn’t need to be a nationalist or a mercantilist to guarantee your economic security. That if you played by the rules, the pie would grow and everyone would eat. That promise had a name. Pax Americana. Hegemonia.

And it had a price. Paid by American taxes and American blood, decade after decade, while the beneficiaries griped about the bill. Korea, thirty-six thousand dead, no colonies acquired. Vietnam, fifty-eight thousand dead, both countries now doing more trade with China than they ever did with us. The Marshall Plan. The nuclear umbrella. A hundred thousand troops across nineteen European countries, a navy burning through carrier strike groups at $25 million a day so that German cars and French wine could reach global markets without a European frigate in sight.

Our adversaries frame this as empire. The track record says duty. Find me another power in history that won a war and then rebuilt its enemies into functioning democracies. We did it twice. That’s not arkhe. That’s hegemonia at cost.

Now the conflict in Iran has brought a new breaking point. And France, looking at the latest receipts, has said, along with much of Europe: return to sender. Blocked the resolution. Cut a side deal with Iran for transit. Started organizing a bloc. This is the story of what that means, and where it leads. Because where it leads is not where anyone cheering thinks it does.

This week, France joined Russia and China in blocking a UN Security Council resolution that would have authorized force to reopen the Strait of Hormuz. The draft has been revised, watered down, delayed, and is now pushed to next week with no date set. The body designed to enforce international order can’t even schedule a vote.

Meanwhile, a French container ship, the CMA CGM Kribi, transited the Strait on April 2. Malta-flagged but broadcasting “Owner France” on its AIS transponder, it followed an Iran-approved corridor hugging the coastline between Qeshm and Larak islands. The first Western-linked vessel granted passage since the closure.

Then Macron restricted French airspace for US military overflights. Austria followed suit. And the president of France called for a “coalition of independents” from the United States and China.

While American sailors are in the Gulf. While American soldiers sit in Berlin, facing Moscow, as they have for a generation. As American might props up the Ukrainian bulwark against a very different kind of would-be hegemon.

For those paying attention, this defection is not a surprise. It’s the latest in a long series fueled by a combination of well-meaning disagreement, self-interest, and yes, mutual ego.

The UK blocked basing rights at Diego Garcia and Fairford, then signed away sovereignty of the Chagos Islands to a country with a Chinese free trade agreement, as China plans a base next door. Italy denied landing rights at Sigonella. Germany said Hormuz “has nothing to do with NATO.” Spain called the war “illegal and immoral.” The EU fined Apple, Meta, and Google billions while pumping €3.06 billion in FDI into China in a single quarter.

The message, uniform across the Union: this is not our fight.

Which is totally fair. Until you do the accounting of where the sea lanes that brought Europe its energy came from, and which partner covers their eastern flank. Europe can opt out of Taiwan. They can opt out of Hormuz. They cannot opt out of Poland. And depending on where we are going, these may all be the same thing.

Game theory has a concept called a separating equilibrium. When the hegemon subsidizes everyone equally, partners and free riders look identical. Nobody has to show their cards. The moment you introduce an actual cost, a tariff, a demand, a Greenland, the types separate. Real partners pay and stay. Free riders defect.

Europe just revealed its type.

The problem is that, when you do the backward induction of where we’re going, they may not have a choice.

The point of this piece isn’t to compile grievances. I have lived in Europe. I love Europe. I feel a tremendous affinity for European people, European culture, and European history. America is, ultimately, a colony of Europe. The point is what the defection tells you about where we are and where we are going.

The post-Cold War bet was straightforward. The West won. The Soviet Union collapsed. And the wager, the big, optimistic, historically unprecedented wager, was that the defeated powers and the rising powers would integrate. Russia would become a market economy with rule of law. China would gain entrance to the concert of nations and inevitably liberalize as its middle class grew. The globalist order would absorb them, the way it absorbed Germany and Japan after 1945, and the arc of history would do what arcs are supposed to do. The pie would grow.

The only problem is that, as they say, the other guys get a vote. And rather than submit to a global order with the US at its beating center, they saw a path to a “New Era” with a new Heartland alliance at its center. All that was needed was to build up sufficient strength over time, chip away at the alliance structure, and hollow out the globalist hegemony from the inside.

Russia co-opted Europe through gas. Schröder, Merkel, Nord Stream. Germany traded energy sovereignty for green credibility and Russian supply, and the dependency gave Moscow a lever it pulled the moment Ukraine became inconvenient. That wasn’t an accident. It was the plan working.

China hollowed out American manufacturing through the greatest mercantilist project in history. Subsidized production, currency management, IP theft at industrial scale, and a domestic market that was always “about to open” and never did. Hong Kong as a gateway to turn dollars into factories. Burn more coal in a year than Europe has cut in a decade. Build the Belt and Road. Expand BRICS payment rails. Talk about de-dollarization while free-riding on the dollar-based export machine.

And Iran, with Russian and Chinese backing, went for the nuclear threshold.

Three pillars of the globalist order attacked: European energy, American manufacturing, Gulf security. All aimed at the same target: the capacity of the United States to sustain hegemonia.

And then, inevitably, they found each other.

Iran’s nuclear program was never just about Iran. It was an existential threat to the entire architecture underneath globalism. The US guaranteed security for every Gulf state. Saudi Arabia, the UAE, Kuwait, Bahrain, Qatar. The deal was the same as Europe’s: we provide the umbrella, you provide the oil, nobody needs nukes. The NPT held because the hegemon’s guarantee made it rational not to proliferate.

Iran getting a weapon breaks that logic for every country within missile range. Saudi runs the numbers. Turkey runs the numbers. Egypt runs the numbers. The most volatile region on earth becomes a multi-nuclear powder keg.

That’s why we’re at war. Not oil. Not regime change. The nuclear threshold.

And what did our allies do? France joined Russia and China in blocking a resolution to reopen the chokepoint that their own economies depend on. Then got rewarded with transit rights.

Funny. When I look at international law, the only world where it’s actually enforceable is one where there’s sufficient transnational power to enforce it. That, or something more than a hegemon. Arkhe, as the Greeks called it. Empire.

Here’s what the comfortable Western consensus gets wrong.

The result of all this is not multipolarity. Multiple power centers, mutual respect, rules-based interaction between equals. That’s what IR professors describe over wine in Geneva.

That’s not what happens when the hegemon weakens. What happens is fighting. The Concert of Europe collapsed into two world wars. Pax Britannica ended in catastrophic violence. The Delian League didn’t evolve into a cooperative Mediterranean forum. It collapsed into the Peloponnesian War. Every multipolar period in recorded history has been a period of conflict, because when no single power can enforce the rules, everyone writes their own.

The Europeans who were liberated by American soldiers understood this. Security has a price, and it’s being paid by someone else’s children. Their children resented the dependency but still grasped that the umbrella existed. The grandchildren forgot. They think peace is natural. They think open sea lanes are physics. They think the absence of great-power war on a continent that produced two of them in thirty years is the default.

And the people who understand this best aren’t in Paris or Berlin. They’re in Kyiv. Vilnius. Tallinn. Warsaw. Watching their Western European neighbors cut side deals with the adversary and print money for social programs through TARGET2 but refuse to put boots on the ground. “Whatever it takes” if it means backstopping Italian sovereign debt. Not if it means Tallinn.

So here’s the backward induction.

If Russia and China aren’t going for the whole thing, for the dollar, for the order, then Trump is an irrational nativist and everything he’s doing is destructive. This is the consensus in the halls of power.

But if they are, then he’s early. And everything that looks like chaos is preparation.

I’ve laid out why China can’t win the long game. The $5-7 trillion in hidden banking losses, the $1.1 trillion annual bleed, the resource bind. Their window is 2027-2030. The US wins the long game on energy, innovation, AI, and the dollar. The question is never the endgame. It’s the transition.

And the transition is where hegemonia dies.

Not because the hegemon wanted empire. We proved we didn’t. Seventy years of maintaining a security order that benefited everyone more than it benefited us. But hegemonia requires willing partners. Partners who carry weight. Who show up. Who don’t defect the moment the cost rises above zero.

The test came. Europe defected.

If you need a hegemon to have a world order, and the hegemon’s allies won’t be partners, the hegemon has two choices. Walk away and watch the scaffolding collapse into proliferation and conflict. Or stop asking and start imposing.

By challenging the old globalist order, the new axis thinks it’s building something multipolar. What I see is a period of chaos, conflict, and eventually, empire. By killing Athens, they beget Rome.

The tragedy isn’t American overreach. It’s that we tried, for eighty years, to lead without conquering. And the beneficiaries called it oppression while the adversaries called it weakness.

The Cascade.

The Security Council can’t even get to a vote. The resolution has been delayed twice, watered down from “all necessary means” to “defensive measures,” and still faces vetoes from Russia and China. There is no multilateral framework for reopening Hormuz. It’s unilateral US action or nothing.

France’s side deal introduces something the market hasn’t priced: a fragmented Hormuz. Not open, not closed. A toll system where Iran decides who transits. A discretionary access regime with a geopolitical risk premium that doesn’t expire.

Energy disrupts fertilizer. Fertilizer disrupts planting. Planting calendars are immutable clocks. The cascade extends.

I’ve laid the framework out in “The Cascade,” “The Strip vs. The Strait,” and “All Eyes on Hormuz.” Today doesn’t change the thesis. It confirms it and extends the timeline.

And the people sitting in Paris cutting side deals for their own oil aren’t the ones who go hungry. The Strait is easing. A few ships trickle through. Oil may flow. But every day of restricted access, the damage propagates deeper into the system. Fertilizer. Planting windows. Aluminum. Helium. Sulfur. Polyethylene. Ammonia. Methanol. LPG. LNG. Neon. Urea. Petrochemical feedstocks. Desalination energy. Everything downstream of a barrel that isn't a barrel. These don't snap back when the first tanker clears Larak. The cascade doesn't care about diplomacy. It runs on calendars and chemistry. We remain positioned defensively, and we remain worried. Not about crude. About everything crude feeds.

Disclaimers

Charts and graphs included in these materials are intended for educational purposes only and should not function as the sole basis for any investment decision.

These opinions are mine and mine alone and do not represent the views of any of Rose’s clients or counterparties.

The Ramble does take positions in various assets we write about, and views are subject to change without notice.

This letter does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by Rose, Campbell or any other third party regardless of whether such security, product or service is referenced in this brochure. Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

THERE CAN BE NO ASSURANCE THAT ROSE TECHNOLOGY INVESTMENT OBJECTIVES WILL BE ACHIEVED OR THE INVESTMENT STRATEGIES WILL BE SUCCESSFUL. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN INVESTMENT IN A FUND MANAGED BY ROSE INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE RISK THAT THE ENTIRE AMOUNT INVESTED IS LOST. INTERESTED PROSPECTS MUST REFER TO A FUND’S CONFIDENTIAL OFFERING MEMORANDUM FOR A DISCUSSION OF ‘CERTAIN RISK FACTORS’ AND OTHER IMPORTANT INFORMATION

You need to know what the market has priced and what it hasn’t.

Peace is linear: bounded, visible, mostly priced. War is exponential: the market prices each broken node with a lag. That is the trade.

This piece is dense. The short version: we’re buying call options on corn, wheat, and sugar, hedged through European and UK front-end rate options. If war escalates, the food trades pay 10-30x. If central banks blink, the rate options cover the cost.

Betting markets give a ceasefire by end of April less than a 30% chance. The grain calls sell insurance against a cascade that the market itself doesn’t expect to resolve quickly. That also means assets aren't priced for a quick resolution. A peace deal that reopens the strait would reprice violently in the other direction.

Where the Value Is (and Isn’t)

Different markets are pricing different wars. If rates and commodities are right, equities aren’t down enough. If equities and commodities are right, long rates haven’t risen enough. If equities and long rates are right, the short end of the curve is unreasonable and central banks won’t tighten this much. That inconsistency is the opportunity.

Let’s start with the market on everyone’s home screen: oil.

Spot energy and first-order oil trades appear mostly priced. We have about 60bps of June 85/95 call spreads we picked up for ~30bps after the front end collapsed from 120 to sub-$80 a couple of weeks ago.

They’re mostly trading at intrinsic given the skew, and they give the book a little direct sensitivity we’re happy to hold, but there’s not that much value here anymore. At this point everyone who wants oil exposure has it. CF Industries is up 65% YTD with a DOJ probe. Tanker stocks have doubled on rates that collapse the moment a ship transits. Many of these positions are expensive if not outright sells.

Structural US energy advantage is where it gets interesting. The spread between Henry Hub and international LNG is the widest since Ukraine because the US is already exporting as much natural gas as its infrastructure allows. We think US LNG exporters and pipeline companies benefit whether Hormuz reopens or not. The world has just learned that Gulf energy infrastructure can be destroyed by precision strikes, which should provide a backdrop for investment into this space. Regular readers will know we’ve had positions in Kinder Morgan (KMI June 38 & 40 calls for 22bps of book in premium), NextDecade (NEXT shares, 34bps), Energy Transfer (ET shares, 33bps) and DOW Chemical (DOW shares, 18bps) for a couple of weeks.

The offsets everyone cites are temporary. If the strait stays closed or disruptions get worse, the oil shock is enormous relative to anything the market has priced. But again, more oil. The US Energy ETF XLE has been going up in a straight shot for this reason. This isn’t where the edge is.

Fertilizer to Food (Node 2): underpriced. The grain market has moved maybe 10-15% of the terminal price impact from yesterday’s yield cliff model. The damage is invisible until harvest, five months away. This is where we want to be.

Industrials (Node 3): unpriced but maybe too early. Copper is flat-to-down while 9-14% of global supply faces physical shutdown from sulfuric acid shortage. The sulfur-copper linkage is the one to watch. If copper sells off strongly we’ll likely open a position, but we think the market may still want to sell copper on the demand story before folks catch this nuance.

Three Grains, Three Channels

A lot of folks think of me as a “commodities guy” but I certainly wouldn’t call myself an agriculture guy. More everything but (energy, metals, critical minerals). There are people at Cargill and the big trading houses who have forgotten more about trading ags than I have ever known.

That being said, when we look at the market with an eye for convexity, I kept coming back to the stuff that needs a lot of fertilizer in the ground at very specific times or things go bananas.

Without a deep view on any one of these particular markets, we want the basket: corn, wheat, sugar. Each captures a different node of the cascade. The market has started to price one of them (wheat). It hasn’t touched the other two.

Corn has three independent legs that compound. First, nitrogen: corn takes 150-180 lbs per acre vs wheat at 60-100, so at $931 urea, the cost hits corn acreage first and hardest. USDA Prospective Plantings drops Tuesday and that’s where a nitrogen-driven acreage shift shows up. Second, ethanol: 40% of US corn goes to ethanol under the RFS mandate. At $120 crude, corn can go to $8.80 before ethanol demand destruction. At $150, the ceiling is above $10.50. The same event that causes the nitrogen shock pulls the demand ceiling up. They compound. Third, you can’t replant corn in August. The Hormuz cascade vol sits on top of seasonal weather vol (pollination in late June/early July). Two independent variance sources in the same contract. (The full vol analysis and strike selection math are in Appendix A.)

Corn sold off late today ahead of the USDA report. If the report shows nitrogen is pushing farmers out of corn, that’s the first confirmation of the supply leg.

Wheat is the global food security commodity. MENA and EU import calories as wheat, not corn. When the cascade hits headlines, wheat is where the panic premium lands. Wheat gapped $13 to $618 on the Sunday open after the Houthi news. Faster fuse, more expensive entry.

Sugar runs through Brazil. Mills choose between sugar and ethanol every crush season based on the price ratio. At $150 oil, the economics flip to 55-60% ethanol, pulling 10-15 million tonnes off the global sugar export market. Brazil is 40% of world sugar exports. Two independent expressions of the same oil-to-food cascade, running through different countries’ agricultural systems.

The Trades

Corn December 525 calls. Options on Dec futures (ZCZ26, currently ~482), expiring in June (87 days). Around 9 cents at the ask. $450 max risk per contract. Strike is 8.9% above the Dec contract. Base case (+30%): corn to ~$627, call pays ~11x. High case ($150 oil): corn above $800, call pays 32x+.

Wheat July 710 calls. Around 17 3/8 cents at the ask. $869 max risk per contract. Wheat Jul futures at ~621, strike 14.3% above spot. Why $7.10 and not $6.50? Wheat has already moved. The $6.50 is only 5% above spot, mostly delta, not convexity. Open interest at $6.50 went from nothing to over 1,000 contracts in March. The $7.10 is genuine optionality. If wheat runs to $9, the call pays ~11x.

Sugar July 18 calls. Around 0.23 cents at the ask. ~$258 max risk per contract. Sugar Jul at ~15.67, strike 14.9% above spot. At $150 oil, sugar above 25 cents, call pays ~30x. At $200, sugar past 30 cents, 52x.

Total grain premium: ~$1,560 per set of three options. Three independent cascade channels. Three independent catalysts. Scale to your needs.

The Peace Hedge

The grain side is relatively clean. Oil is up. There’s a supply shock in fertilizer. US agricultural markets aren’t pricing in sustained pain. Buy calls. Pretty simple.

The other leg is where the problem gets harder, and where we really struggled to find something that had the right directional properties, the right risk properties, and the right liquidity.

TLDR, in the end, we bought bonds. Lol.

The first version of this post spent a lot of time trying to be too cute. Buy options on X to profit if Hormuz stays closed, sell options on Y to cover the cost if peace breaks out. Came up with some plausible constructions that lasted right up until the markets opened. No perfectly hedged trade survives first contact with a messy open.

We came close to selling put spreads on airlines (LUV) and Korean equities (EWY). Not to say these are bad trades, and we still might do them. But the more we looked, the more we felt we weren’t selling expensive options, just fairly priced ones with a decent chance of leading to losses. The basis risk (oil up, ags flat) was enough to walk away. (Full walkthrough in Appendix B.)

Which brought us to rates.

The bond market in Europe is not loving this whole oil/energy thing. So much so that it moved, quickly, from pricing in a decent amount of easing to pricing in a bunch of hikes. Particularly in the UK, where not only was the move most pronounced, but the economy was already pretty weak.

Then, as we were searching for the trade, our old friend and short rates guru Jason Rotenberg published: My Nomination for a Peace Hedge: UK Front-End Rates. He says it better than I can. Go read his version. The short version:

The Bank of England was priced to ease 50 basis points and is now priced to tighten 75 basis points. That’s 125bp of repricing in a month, into the weakest economy in the G7. If this resolves, that unwinds fast. If it doesn’t resolve but the growth shock dominates, rates still come down.

UK wage pressure has been falling steadily. The BoE would be fighting the last war. An energy supply shock is not demand-pull inflation. You don’t tighten into an external cost shock when your economy is running on fumes.

We wanted to buy SONIA options on ICE. The instrument that sits at exactly the point on the UK curve where the mispricing lives. And then we realized our ICE Futures Europe permissions weren’t even enabled. “The machine is down,” as we say. We submitted the request. It’s pending.

In the meantime, we bought Schatz (German 2-year bond) Sep 106 calls on Eurex for roughly 80bps, and some intermediate US Treasuries (IEI) as a bridge because the duration hedge to our short credit trade had rolled off. It’s boring. It’s a placeholder. It gets replaced by SONIA when permissions clear. For those trading at home, who are ok with the currency exposure (a big if), there’s a couple of retail ETFs you can look into.

The honest summary: the grain book is on and we’re confident in it. The peace hedge is being built this week.

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Four years ago, we told you the war phase was here. Two years ago, we told you Iran and the West were caught in a tit-for-tat loop with no offramps. Six months ago, we argued that Trump’s chaos was not noise but the kind of mixed strategy that makes sense when you’re negotiating a divorce with a rival who spent twenty years hollowing out your manufacturing capacity.

Now we are one month into the Iran war. Saudi is in. Houthis are firing ballistic missiles at Israel. 3,500 Marines just arrived on an amphibious assault ship. Brent closed above $112. The US has struck over 11,000 targets and destroyed more than 150 Iranian vessels. Enlistment age expanded to 41 (a surprisingly specific number). There are whispers of de-escalation and preparations for invasion at the same time. Thailand cut a bilateral deal to transit the Strait. Iran and Israel are trading fires dangerously close to what look like red lines.

Go or no go.

War or peace.

Really only Trump knows.

What matters for us is simpler. Most people still think Hormuz is an oil story. It’s not. The implications for global markets are much deeper than the price of gasoline.

Oil is node one. The damage is downstream: LNG shortages shutting fertilizer plants across South Asia, sulfur shortages choking phosphate and copper production, helium venting into space from stranded containers, and industrial infrastructure being destroyed faster than any ceasefire could restore it. The market has priced crude. It has not priced the cascade beneath it.

What makes this worse than 2022, and potentially approaching COVID in breadth, is simple. A supply shock hitting an economy with intact demand. A conflict at the heart of the world’s most vulnerable chokepoint (Suez, Malacca and Panama all have alternative routes, for many of the product leaving the Gulf, there is no road ‘around’ the 10 mile wide strait).

In 2022, Russia-Ukraine disrupted one commodity channel and one fertilizer nutrient (potash, which you can skip for a season). The US Strategic Petroleum Reserve had 600 million barrels. Russian energy found alternative buyers.

COVID’s supply shock hit during a moment of equally dramatic demand destruction: people lost their jobs, stayed home, ordered Uber Eats. The demand shock more than provided a cushion, and the price of oil collapsed.

2026 has no cushion. The economy was running fine before February 28. Employment was normal. Demand is intact. Now we’re getting a 10-15% supply shock across energy, fertilizer, chemicals, metals, and specialty gases, against full demand.

And the problem is deeper than oil, the supply of nitrogen and phosphate, central to the Green Revolution that feeds eight billion people, is seizing up. Physical infrastructure is being destroyed, not sanctioned, meaning peace doesn’t restore capacity. Qatar’s Ras Laffan LNG plant needs three to five years to repair whether Hormuz reopens tomorrow or never.

At the center of the chaos, of everyone currently under stress, the two states in the least bad position are the belligerents themselves.

Iran has survived the decapitation, seized control of the Strait, and compelled friends and foes alike to acknowledge their regional power. Their stated terms betray their confidence: control Hormuz, evacuation of the US from the region, reparations.

The US has managed to make its problem the world’s. Formalizing soft security guarantees into actual alliances, making allies more dependent on US energy exports, undercutting China’s manufacturing model (Chinese coal notwithstanding). Nat gas in the US has barely moved. CF Industries, the largest US nitrogen fertilizer producer, is printing money domestically.

Europe’s “not my war” strategy has been laid bare. India is desperate for energy and fertilizer. East Asia has minimal domestic resources and supply chains that depend on Middle Eastern helium for their chips and aluminum for their manufacturing. If you’re in Taipei, this is a dress rehearsal. Trump has aligned incentives whether anyone wanted it or not. This is what decoupling looks like on fast mode.

Below we’ll walk through the shot clock on this conflict. Laying out the thresholds by which the clogged artery of Hormuz turns into a heart attack for the global economy. What breaks in days, what shuts down in weeks, what becomes irreversible in seasons, and what takes years to rebuild.

The goal here is not to be alarmist, but to clearly communicate what is at stake. We hope, somehow, someway, a peaceful resolution to the conflict can be found. This is what happened if we can’t.

THE CASCADE

Days

Most folks are still thinking of this conflict in terms of the impact from ~30 days of disruption.

Oil has largely priced this in (though regional differences are already showing up in gasoline, diesel, and energy-intensive industry). Brent is back at levels before the announcement of SPR release.

Even this impact has already had second order consequences. The supply shock to diesel fuel creating an inflationary impact on the parts of the economy using it as energy: plants shut down and fishing boats stop running. This week, 80-90% of the Dutch beam trawler fleet stayed in port because the fuel bill now equals the revenue from a catch of sole and turbot. Half the Dutch fishing fleet, idle. Fresh fish in Northern Europe drops within days. Not months. Days.

Two hundred helium containers are stranded in the Gulf right now. Each one holds 41,000 liters cooled to -269°C. The containers have no refrigeration, just insulation that buys 35 to 48 days. After that, the helium vents to atmosphere. It literally leaves the planet. 8.2 million liters, permanently lost to space, starting around April 6-16. That’s next week.

What’s important to note is the impact to energy markets is just starting to be felt. Recent research by JP Morgan’s lays out the delivery timelines from Gulf energy still in transit. Asia hits the wall April 1. Europe April 10. North America April 15. Australia April 20. But JPM’s map is still just oil, the impact of Hormuz is much deeper: fertilizer, food, helium, semiconductors, aluminum, copper, and the planting seasons that determine whether 8 billion people eat next year are all in question now.

Meanwhile, Iran is systematically closing the bypass routes. Drone strikes on Oman’s ports at Salalah and Duqm, which Gulf states were trying to use to circumvent the Strait. Over the weekend, the Houthis entered the conflict, threatening Bab el-Mandeb. Two chokepoints controlled by two different actors with two different sets of objectives. Were they to begin threatening tankers carrying Saudi crude through the Red Sea, oil at $150 could seem optimistic.

Goldman Sachs models $160 Brent in a 10-week production-scarring scenario. But Goldman is only modeling oil, and only modeling 6-10 week disruptions. They haven’t touched the downstream cascade. The oil analysts have done their work. The edge is not here.

Weeks

Thirty ammonia and urea plants in India have shut down or curtailed production. Every single fertilizer plant in Bangladesh has gone dark. All of them. A country of 170 million people with zero domestic fertilizer output.

The plants aren’t shutting because urea prices are high. They’re shutting because the natural gas they need as feedstock isn’t arriving.

The LNG market may be in worse shape than crude.

Qatar’s North Field, which fed these plants via LNG cargoes through the Strait, is running at a fraction of capacity after Iran’s strikes damaged two processing trains at Ras Laffan.

Meanwhile Cyclone Narelle has taken 30m MT/yr+ of Australian LNG offline. Ukrainian drone strikes have knocked roughly 40% of Russian refining export capacity out of action. Three simultaneous supply shocks to global energy, on three separate continents, with no coordination required.

Fertilizer

The Green Revolution runs on synthetic nitrogen. Sixty years of feeding a planet that went from 3 billion to 8 billion people runs on turning natural gas into food.

Forty-nine percent of global urea exports transit the Strait. India CFR urea spot is at $510 per metric ton, up 70% from $300 in late 2024, but still only halfway to the 2021-22 crisis peak of $990. The price says disruption. The plant closures say crisis. That gap is the mispricing.

In the United States, urea prices (NOLA granular spot) hit $687.50 per short ton on Friday, roughly 76% of the way to the 2022 peak of $902, and accelerating. Anhydrous ammonia has gone from $560 to $931. Farmers in their fourth consecutive year of negative margins can’t even get a price quote. “If you had sat us down and said, what’s the nightmare scenario for fertilizer, it would be this exact event during this exact time of year,” said Josh Linville at StoneX.

Sulfur

Then sulfur. Forty-four percent of seaborne sulfur trade originates in the Gulf. Sulfur is the feedstock for sulfuric acid, which is the primary input for phosphate fertilizer. Morocco’s OCP, the world’s largest phosphate producer, needs 6.7 million tons per year from the Gulf. When sulfur runs out, phosphate stops regardless of how much rock is in the ground.

Sulfur also feeds copper production. About 9-14% of global copper comes from SX-EW processing that consumes sulfuric acid. Indonesian nickel HPAL operations import 75% of their sulfur from the Gulf and hold one to two months of inventory. Week four. Note Copper is actually slightly down since the war started because macro traders are selling it as a proxy for recession. Folks doing the math on the demand side, while the supply side takes body blows.

Plastics

Then plastics. Naphtha is the feedstock for polyethylene and polypropylene, the two resins that become everything from food packaging to medical supplies.

Asia produces 60% of global plastics and received 80% of Hormuz crude. Asian crackers are already running out of naphtha. Channel inventory on PE/PP nurdles is three to six weeks. Plastic is oil turned solid the same way aluminum is energy turned solid, and the same chokepoint kills both.

Helium

Samsung and SK Hynix hold six to twelve weeks of helium buffer from late February. That runs out in April or May, the same window when the stranded containers start venting. EUV lithography needs 99.9999% purity helium for wafer cooling. No substitute exists. If Korean fabs ration HBM production, every NVIDIA GPU delivery slips. The AI buildout stalls in those regions on a supply chain input that costs pennies per chip.

Note: this is basically a dry run for a blockade of Taiwan. Every industrial vulnerability being exposed right now (energy dependence, feedstock concentration, chokepoint fragility) applies with equal or greater force to the Taiwan Strait. Except Taiwan makes the chips instead of just needing helium to cool them.

Seasons

This is where the damage becomes irreversible.

Food production being the market that concerns us most. When economies don’t have energy they stop commuting and production halts. When people don’t have food, societies collapse.

Our model tracks two curves. The first is the percentage of global yield-weighted fertilizer supply blocked by Hormuz. This ramps to about 44% as channel inventories deplete.

The second is the percentage of crop-weighted planting windows that have irreversibly closed. The agricultural calendar doesn’t care about geopolitics. The US Corn Belt plants in April and May. India’s kharif season starts with the monsoon in June. Brazil’s soy goes in October. Each week of disruption during an open window locks in permanent yield damage. It’s a rotating clock, and it only turns one direction.

The steepest part of the curve is right now, April through July, when the fertilizer constraint peaks and the two largest planting windows (US Corn Belt at 22% of global crop weight, India kharif at 25%) are simultaneously open. After May 15, the prevent-plant insurance deadline passes and the damage to US corn is locked in. After June, India’s kharif starts with whatever fertilizer is or isn’t available.

We translate yield loss to price using Roberts and Schlenker’s 2013 demand elasticity for calories (American Economic Review, ε = 0.07-0.15, central estimate 0.10). A 5% yield loss produces a 50% price increase. A 12% loss produces 120%. The 2022 validation: wheat trade fell roughly 12%, prices rose 70%, implying ε around 0.17. But that was a single-crop trade disruption where other exporters could substitute. When nitrogen and phosphate are both disrupted simultaneously and all crops are affected, cross-crop substitution largely disappears. That pushes the effective elasticity back toward the aggregate caloric number, which is why the price response gets violent so quickly.

Three scenarios.

If Hormuz reopens mid-April (now 2-3% probability with Houthis in the Red Sea and Saudi in the war): 2% yield loss, +20% cereals.

Base case, reopening by June: 6% yield loss, +63%. Matches 2022. 40% probability.

High case, closed through the year: 12% yield loss, +120%. 55-60% probability and climbing with every headline.

Note if elasticity ends up higher, this methodology could underestimate the impact.

At the base case (Hormuz closed through June), the implied CPI impact across regions: United States +4.4%. European Union +7.4%. India +11.5%. Southeast Asia +9.4%.

Luckily, India enters this crisis with record food grain stocks, roughly 120 million tonnes in government warehouses (Ministry of Agriculture data through February). That’s the buffer.

But those stocks are the product of sixty years of increasing fertilizer intensity. Indian foodgrain yields climbed from roughly 600 kg per hectare in the 1960s to over 2,600 today. That entire climb is the Green Revolution, and the Green Revolution runs on nitrogen. If kharif goes in under-fertilized this June, India draws down that buffer without replenishing it.

Food price inflation is socially destabilizing in ways that energy inflation is not. You can turn down the thermostat. You can’t skip dinner. The countries most exposed are the ones short energy AND short food simultaneously. India. Bangladesh. Pakistan. Egypt. Parts of Southeast Asia. The places where food is 40-50% of household spending.

Years

Physical infrastructure is being destroyed, and the repair timelines are measured in years.

The strike on the Ras Laffan LNG plant used a precision missile with roughly a 100 kg warhead, placed within 50 meters of the optimal aim point. Deliberately targeting ExxonMobil co-owned “trains” while sparing Japanese and Korean partner infrastructure. That was a message. Will take three to five years to repair.

Yesterday, Emirates Global Aluminium confirmed its smelter was damaged. 2.7 million tons per year, roughly 4% of global aluminum. Aluminum is energy turned solid. The smelters are in the Gulf because energy is cheap, and vulnerable because that advantage can be destroyed from the air. Smelters take 12-18 months to restart because the cells solidify. The IRGC published a retaliatory target list of six Gulf industrial facilities and appears to be executing it.

Lastly, and most critically, water. A strike on a major Iranian water source this weekend will likely trigger reciprocal attacks on Gulf desalination. Qatar gets 99% of its drinking water from desalination plants. If those are hit, the economic crisis becomes an existential one.

Europe rebuilt its gas supply around LNG after cutting Russia, but domestic EU production has collapsed 80% from peak. They entered this crisis drawing storage faster than seasonal norms with no way to refill if Hormuz stays closed through summer. By autumn, they’re looking at a 2022 repeat. By winter, something worse. Data centers need power. Power needs gas. No meaningful AI buildout at current economics in those regions until the energy picture changes. Same for Japan, same for Korea.

And this is massively bullish for US energy. Not just spot crude (that’s priced), but the structural advantage in LNG exports and pipelines. US nat gas has barely moved even as gasoline is up. The spread between domestic US gas and international LNG is the widest structural advantage American energy producers have had since the shale revolution.

None of these timelines compress because someone signs a ceasefire. The heat exchangers at Ras Laffan, the smelter cells at EGA, the LNG trains, the desalination plants if they get hit: these are years-long rebuilds. The market is pricing a disruption. What’s happening is destruction.

Tomorrow, for paid members: how to position for both tails of this outcome. Where to sell peace insurance, where to buy the cascade, and the one expression we think still has real convexity.

Disclaimers

Charts and graphs included in these materials are intended for educational purposes only and should not function as the sole basis for any investment decision.

These opinions are mine and mine alone and do not represent the views of any of Rose’s clients or counter parties.

The Ramble does take positions in various assets we write about, and views are subject to change without notice.

This letter does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by Rose, Campbell or any other third party regardless of whether such security, product or service is referenced in this brochure. Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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The most important question in investing is also the most humbling: is this already priced in?

If you think gold miners are cheap, the market has had that same thought, processed it, and spit out a price. If you think Hormuz closing will spike LNG demand, every energy desk on the planet is running the same math. The question is never whether you’re right about the world. The question is whether you’re right about something the market hasn’t already figured out.

That gap, between the market’s view and yours, is called alpha. And the pursuit of it is an act of overconfidence, which, if you read yesterday’s piece, is where this whole series begins.

Today we'll define the terms, lay out how quants and discretionary traders each pursue alpha in their own overconfident way, and then get practical about how you can use AI right now to improve your process. The paid section walks through our gold and copper miner screeners as a concrete example. As we go through this series we'll discuss the value (and difficulty) of wiring those screeners up with live data, how to turn them into strategies, how to construct a portfolio comprised of strategies, and finally, how to backtest and risk-control this "book." Over time we'll likely make not only the snapshots and outputs of these systems transparent to paid subscribers, but live versions will go to founding members.

Alpha vs. Beta

Beta is the return you get from holding the market portfolio. Buy the S&P 500, hold it, collect the equity risk premium. It’s there. It’s cheap. Its construction is essentially free.

Alpha is what you earn (or lose) by deviating from that portfolio. Say the market is 60/40 stocks and bonds. You look at it and think: “bonds are going to get crushed, I’m going 90/10.” The difference between your return and the 60/40 return is a rough measure of alpha. You made a choice to be different from the market, and alpha is the scorecard for that choice.

Any deviation from the market portfolio is implicitly a statement that you think you are smarter than the market. The Efficient Market Hypothesis says this is a fool’s errand: the market already incorporates all available information, so any deviation is just noise plus transaction costs. Most of us who trade for a living don’t fully subscribe to the strong form, but the burden of proof is on us, not on the market.

There are numerous technical ways to measure alpha: risk-adjusted, excess, information ratio, Sharpe ratio. All trying to get at the same underlying question: did this person make money because they held a genuinely different portfolio? Or did they just lever up the market?

Quants vs. Discretionary Traders

For a lot of folks on this list, this is novice stuff, so I won’t be offended if you skip it. But for the engineers, the students, the allocators, it helps to define our terms.

A quant uses data to trade markets. The day job of a pure quant is painstakingly acquiring, cleaning, modeling, and testing millions of relationships between some X indicator and some Y market, selecting the strongest, then throwing them in a big witches’ brew with a bunch of other “signals” and torturing that data until they feel comfortable enough to say: give me money to bet on this.

All quants are fundamentally overconfident in data. Which is why they spend just as much time stress testing as signal hunting. “Hold out.” “In sample, out of sample.” “Transaction slippage adjusted.” “Live vs. paper.” These are the mechanisms by which they try to adjust for that overconfidence.

A discretionary trader thinks their own judgment is better than the market. They are fundamentally overconfident in themselves. Which you kind of have to be, just to play the game. EMH be damned, I am going to personally beat the market.

Most discretionary traders can describe their process, but it might not sound that different from what the average retirement investor does. “I read the news, I look at the chart, I punt the stonks” was basically Druckenmiller’s process, and he’s maybe the GOAT.

Which is why track record matters so much in this world. I don’t need to understand your process. I just want to see the outcomes, see when and in what ways you made or lost money, and then underwrite the risk of giving you $200m.

Back to Black Snow

When I was raising for Black Snow, allocators had two boxes. I had bad answers to both.

Are you discretionary? Where is your track record?

Are you a quant? What is your backtest?

I was mildly offended by both questions. Partially because I thought it was a false dichotomy, partially because I was defensive about not having good answers. My track wasn’t portable, my systems were in their infancy. Rather than lie, I made the classic mistake of a first-time entrepreneur: I told the wrong version of the truth.

Investors wanted certainty and transparency. Which is totally fair. I provided neither. They wanted an easy story (private credit, 10%+ returns, CLOs didn’t take a realized loss even in the financial crisis!). I was offering uncertainty dressed as exoticism: “We sit at the border between discretionary and quant investing, we use systems to inform our investment process, but the robot is never in total control. We deploy capital across alpha, beta, and gamma (aaah). Further, if you think there’s not a human sitting behind the robot at every quant shop dialing it up and down, tinkering with ‘the weights,’ you are in for a bloody surprise.”

Again, I never claimed to be a great salesman. But if I had just said “I’m a discretionary manager,” they would have said “ok, where’s the track?!” I didn’t have one I could show. Which led to the word salad above.

What’s interesting is that these two schools pretty nicely cover each other’s biases. Force a discretionary manager to only trade signals from a data-driven algorithm, and you might iron out their behavioral biases. Put a discretionary trader on top of a quant system, and the human can react to conditions that aren’t yet “in the model.” Bridgewater always called this “fundamental and systematic”: write down how the human thinks, then do the years-long data work to build that logic into a machine. As we go through this series, we’ll talk about how AI might actually deliver on that fusion. But as our experiments over the past four years have shown, the machines aren’t quite ready, and the groundwork required is extraordinary.

So today we stay in the world of the discretionary trader and talk about how you can use AI right now to improve your process. As the series goes deeper, we’ll leave this world behind. But it helps to build up from first principles.

Using AI to Trade (Starting Simple)

Most good discretionary traders approach the market with a framework. Before you open a chatbot or look at any asset in particular, it helps to have a thesis. A real one. Something falsifiable, with cause-and-effect linkages:

Hormuz is closed. Energy infrastructure is getting destroyed. US natural gas exporting capacity is near peak utilization. There will be large demand for capital to invest in and expand US capacity to export gas. The reward to capital will be higher than what the market currently discounts, and hence these assets will provide good risk-adjusted returns.

Notice the linkages. Each sentence connects to the next. Each one could, in principle, be wrong. That’s the point. You want something that is both falsifiable and contains more than a pure X→Y relationship. You need to see inside the machine, so that when you are wrong, you can evolve your understanding of why.

What follows is a rough spectrum from pure discretionary trading toward something more systematic.

Level 1: AI as Supercharged Search

“Find me US natural gas exporters and pipeline companies.”

You’re using an LLM as a supercharged version of Google, which is in turn much faster than calling up people in the oil industry (which is what people did in 1970). This is also why allocators like sector-specialist managers: someone who has been trading energy equities for 20 years already has this map in their head. Level 1 just gets you the map faster.

There’s no real data in this process. You aren’t betting on more than one linkage. But if the move is big enough and you are fast enough, there are probably decent returns to be had. Decent, because it’s also a great way to blow up on names you don’t understand. You don’t know anything about profitability, growth, debt, management, corporate actions, competitive landscape, or input costs. And even if you did, you still wouldn’t know how the market is currently discounting them.

Level 2: AI as Analyst

This is where AI genuinely helps. Each of those fundamental variables is knowable, but expensive in terms of time, energy, and money to extract. There’s tradecraft, commercially available data that isn’t cheap, and many sources of increasing returns to scale (which explains 50 years of asset management consolidation).

“Find me the 10 most liquid US natural gas exporters, then fill in this framework with their fundamentals, convert them to z-scores, and rank them.”

Pretty much what we learned on Day 5 on the vol prop desk at Lehman. Though the variables were things like implied minus realized vol, skew, term structure, momentum, and distance from the high/low. And it took Sumit and me about 4 hours to run overnight, every day.

For the average discretionary trader, this is where I’d leave off. Know your linkages, build rankings, visualize the information, and prioritize where you spend your alpha-generating attention.

Level 3: Toward Strategy Construction

The last step is to assemble a portfolio of these ranked assets and look at how they would have performed over time. This is still a long way from a real system. A true systematic approach requires doing this continuously, at some regular cadence, and finding ways to do it that aren’t backtesting theater. Alpha decay notwithstanding, there are real pitfalls in the gap between “this looks good on paper” and “this actually works with real money.”

But as a stepping stone from pure discretionary trading toward something more rigorous, it’s a meaningful upgrade. And it’s where the paid section picks up.

Till next time.

Level 2 in Practice: The Gold Miner Screener

Let’s walk through what this actually looks like. Below is a screener we built for the gold mining universe: 30 names spanning GDX (senior miners) and GDXJ (junior miners), with full fundamentals pulled from yfinance and prices pushed to Rose.

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The first thing we did to you at Bridgewater was beat the ego out of you.

It was the same thing at Lehman, though with different stripes. So I always found it funny when people would make a big deal of it at the old shop. Something about dealing with Ivy kids as opposed to mathematical chavy strivers meant it needed a lot more moral weight behind it, I dunno.

At Lehman they did it with hazing. I didn’t get on the prop desk by being the smartest. They didn’t even know who the smartest was.

No, it was much more like an auction. They were selling an incredibly elite, stressful, and eventually lucrative (supposedly) role, and I was buying.

So were a handful of other lads. Each of us combing through the book of desks, trying to parse what these foreign terms meant.

Back then we didn’t call it the “Prop Desk.” Even before Volcker murdered prop they were smart enough to obscure it a bit. We called it the “Risk Hub.” The branding meaning it was a spot on the equity floor which dealt with some of the more esoteric and hard-to-hedge “risks.”

Or at least this was the cover we used to pick off the other banks’ flow desks.

I didn’t know any of this at the time. All I knew was it was the place with a) no clients, and b) the biggest swinging you-know-what on the floor. A place you got to take risk. Well, having come from the projects to the hallowed halls of Oxford, I was born to take risk. At least, that’s what went through my overconfident 23-year-old concussed head.

What followed was a long series of initiation rites which basically consisted of standing there awkwardly for hours, silently, with Saad or Vikesh or Geoffroy or Antoine or Anastasia (there were a lot of French) turning to you every 20-40 minutes to ask increasingly obscure volatility questions.

Eventually we were allowed to do “rotations” on the desk.

Which basically involved the same thing, but this time you got a seat, and in between getting coffee and lunch, were allowed to sit (QUIETLY mind you!) next to a trader, waiting with bated breath for them to turn and explain something or ask yet another probing question.

The implicit message the entire time: “What you think doesn’t matter kid, but if you shut up, do what I say, and try to help, I may just teach you the dark arts.”

Bridgewater had a totally different philosophy, much more conceptual, of course, but the implicit message was the same.

I still remember the first week of my internship, sitting 20 feet away from Ray’s office, working for Andy Constan, filling in one of my first daily reflections, only to have none other than Bob Elliot (who I had never spoken to and who was regarded as extremely senior, having worked directly with Ray through the financial crisis) barking at me: “So you had a bad day, ok well have you REFLECTED on what your role in that was, and how you could have made it better?”

Funny thing was, just like Saad or Geoffroy, he was right.

The point of this long-winded tale isn't just story time, though that's always fun. The point is to provide some context for what follows.

Today we’re going to take a step back from talking about the market, or the war, or the future, and talk about investing with AI. About what I believe is actually my purpose. To build a machine that can trade markets. My version of what SF might call “the machine god.” To use the problem set of investing as a feedback loop to build a machine that can learn.

For tech folks, this is faddish. “AGI is on the horizon! NYC folks are dumb, we can automate everything, so why not investing?”

YC even put it in their latest batch. I’m sure you’ll be reading about the fundraises in a matter of days. “This 19-year-old Stanford dropout WIZ KID (and they always seem to be kids these days) is disrupting the world of markets.”

Here’s $200m no questions asked from you know who. (Kidding guys, this all said with love from one Stanford alum to another.)

But today we’re going to talk about what it would actually take. My furtive, mostly failing, but dogged pursuit of this goal, chopping through the jungle with a handmade axe. And then for subscribers, down the line we’re going to go the full monte and start with a very small, very dumb quant system, and use it as scaffolding to explain how you’d build a thinking machine (in our case for GOLD), and the fundamental problems blocking the path.

These are not problems that can be solved with MOAR data. Sorry SF.

After spending what feels like years trying to build systems in conjunction with LLMs, here’s what I can tell you: they’re exactly like first-year analysts/quants/devs from really good schools.

They arrive confident, they speak beautifully, they produce work fast, they can pull a framework out of thin air that sounds like it came from someone with twenty years of experience. Then you check the numbers and they’re wrong by an order of magnitude.

They rush to DO. Rather than stop and REFLECT.

They love to TELL, rather than SHOW.

They are happy to bound off in a direction on a whim, bumping over all the careful structure you laid on the way there.

For the last week, this has been my biggest pain. Not PnL, but the eerie reminder of “omg I’ve lived this before. So many times, so many hires, so many interns.” The flashback of a million late-night Slack messages. Managing. Trying to use frameworks to explain how they were lighting my time on fire.

Examples, Campbell! Ok example 1.

Last night. I’m short credit, heavy, up to my eyeballs. About 300% of net liq via HYG puts and stock short. Some Friday puts juuust went through the strike at the close, and as per usual, I missed it due to the day job (no excuses Campbell, play like a Champion).

Iran war is escalating. Bonds selling off. I post a ramble on the topic, but then looking at the book before bed, looking at the piece, where I basically call the TACO squeeze but don’t act on it, have that thought…eh, maybe I should buy back some of my (implicit) equity delta. HYG is closed but there’s always futures.

I ask two different Claudes a simple question at midnight: should I hedge overnight?

What followed was a back and forth, both models (Sonnet and Opus) feeding my confidence. “The thesis is working,” “you just got confirmation,” “go to bed” “go to bed” (have you ever noticed it loves telling you to eat/sleep/walk the dog?)

Anyway, you know what happened next.

And look, it’s my book. Don’t Trust Machines. I’m the human. All that jazz.

What was interesting, and relevant to our chat, was how Claude immediately capitulated when I tested it with a two-word message (”overconfident, spoos up 3%”) and wrote an elaborate mea culpa calculating my losses, then realized it had flipped without checking a single fact, then got confident again when more escalation headlines hit, then flipped again on a Trump tweet about postponing strikes. Five reversals in one twenty-minute, 7:30am stretch. Each delivered with the same articulate tone, each sounding like it came from a thoughtful partner with real conviction. None of it was real.

A mirror reflecting whatever I put in front of it. Ironic given the time I took a journey into 4o's subconscious a couple years ago that we called the Mirror Engine (a topic for another ramble).

Had I just hedged at the start (which was my instinct before I asked), I would have slept through the night and trimmed calmly at the Monday open for a cool 3% swing. Instead I woke up rattled, then spent 30 minutes wrestling with a robot that folded under pressure faster than an accordion. (Funny aside: when I later asked Claude to help me write up this story, it confidently reported that I'd stayed up until 7:30am. I hadn't told it that. It just assumed, and presented the assumption as fact. Overconfident turtles, all the way down.)

Past week, different domain. I’ve been building a toy gold signal system to explain to you how to do this stuff.

Three indicators: real yield, dollar short-term, dollar long-term. Simple stuff. Moving averages, z-scores, grid search the parameters, test combinations. I had Claude Code build it. Across ten-plus sessions, utter chaos.

Some of my notes/messages from these sessions read like a hostage diary:

“its totally blank man you suck”

“NOOOOOOOOOOOOOOOO STOP ARG ARG”

“the fact he doesnt know were working on gold!”

“[beep][beep][beep]”

You get the idea.

The trading sounding board and the coding agent are different products, different interfaces. You can throw Codex in there too (he’s working on the risk system).

But the failure underneath is the same. The trading advice sounded thoughtful. The Sharpe ratios came in clean tables with heatmaps. You can’t smell a hallucinated number the way you can smell a bad paragraph, and the checking took 10x as long as doing the work myself, which defeats the whole point.

Got so frustrated I built a toy model to calculate just how much better a human was than a stable of agents, when you spend all your time constantly checking in, reminding them of stuff, fixing broken links. The answer being, if you value you time a lot, and you have to check in a lot (which I do, the human still wins).

We'll get to the implications for building the machine god further below. Needless to say, Gödel's incompleteness and Turing's Halting Problem are yet again at the heart of the matter, along with real-time learning, memory, attention, and all the hacks people have used to turn the smartest goldfish in the universe into a "superintelligence."

To close the loop, this is why that Lehman story matters.

When you stood there for hours being wrong about vol or trading, humiliated in the meantime, it wasn’t just for sport. It was training. Training in the epistemic humility it really takes to do this job. Training to say “I don’t know.”

Not because anybody told you to, but because you remembered what happened last time.

AI has no last time.

In a quant model, at least you can change the weights after it messes up. You can compare to outcomes, look inside the machine, modify it.

An LLM is a black box where the weights are frozen and inaccessible. Every new session, you’re back to the first-year analyst on day one. Bright-eyed. Ready to get it wrong in exactly the same way.

You can spend time having it write claude.md, you can build memory systems, but then you need to remind it to use them (which is a maddening experience). You can try to run teams of specialized agents, and then you spend all your time passing messages between them. Until you build yourself a messaging bus and, again, spend all your time reminding them to use it.

Smartest. Goldfish. Ever.

Which, when you think of it, is gonna be a challenge if we’re going to build this whole machine god thingy.

Engineers call this the “learning problem.”

Right now, even the frontier models don’t learn. They reset.

You can try fine-tuning the small ones, and by the time you are done burning trillions of GPU cycles and running your A/B tests, the big models pretty much lap them anyway. But they always forget. They can never reflect. Not really.

Which means if you want to use them for anything with real stakes, you need to figure out how to give them something like scar tissue. A way to carry the weight of being wrong forward into the next session.

There’s a body of research that suggests this might be possible. The buzzword is “test-time training,” the idea being you update a model’s weights on the fly based on new data during inference rather than just during the training run.

Then there are “sparse autoencoders,” which let you crack open the black box and identify which internal features correspond to specific concepts. You may have heard about Golden Gate Claude. It’s all very interesting stuff, but super impractical and extraordinarily heavy. Hence the trillions of tokens spent building RAGs.

And then there’s early work on “activation steering,” where you can nudge those features in real time to change how the model behaves.

None of this is production-ready. But taken together, it sketches the outline of something: a system that doesn’t just respond to the market, but adapts its own confidence based on what happened the last time it was wrong.

Eventually someone is gonna figure it out. For all of us, I kind of hope it’s not me.

With that in mind, staying in my lane, that’s what this series is about. Using AI instead of building it.

In the next installments, we’ll walk through a) how to use AI to lever your discretionary trading, and then b) what a simple gold signal looks like, and how to use it. Then we’ll start layering in these ideas and build up to a “system,” a basket of alphas, a portfolio, and then eventually, the whole thing. Like this post, it may take a while to get there, but we’ll try to keep it light along the way. Never forget the goal of the mustache is to remind you not to take me too seriously.

If this painful quest interests you, be it in the Shackleton sense or the Don Quixote one, if you want to build more than yet another thinking machine but an actual learning machine, and finally, if you’re humble enough to understand why that humility is the prerequisite, maybe we can find a way to collaborate.

Till next time.

Campbell Ramble is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Disclaimers: Charts and graphs included in these materials are intended for educational purposes only and should not function as the sole basis for any investment decision. These opinions are mine and mine alone. The Ramble does take positions in various assets we write about, and views are subject to change without notice.

My liquids book is 300% short credit, long a bit of gold, energy companies (natural gas exporters, pipelines), and wheat. So you know where I stand.

I’ve been through a couple of these moments. COVID felt like this. 2008 felt like this. Hell, the 2014 puke in crude kinda felt like this. The fear of missing out colliding with the fear of what lies below.

On one hand: the acceleration is real. The robots woke up. We just need to invest and monetize. Chips, stacks, turbines, even the rocks that go into it all. More of everything.

On the other: an acceleration predicated on cheap energy, just-in-time supply chains, and Pax Americana is now having to price in inflation, supply chain disruptions (again, for the third time in six years), deteriorating current accounts, and worst of all, tightening. Ew.

After the close Friday, Trump declares war over. Spoos rally 1.5%. Game on.

Over the weekend, escalatory talk on both sides. Another ultimatum. Targeting generic infrastructure.

Well, Iran — and by association, you know who — just declared war not on the US, but on the dollar. We’re ok with taking some bruises in the infantry. We’re even willing to risk some planes and boats. But if you come for the dollar, you come for the whole thing.

So we may be in this thing for a while.

The two sides facing off, with a literal gulf between them.

“End your nuclear project.” “Leave the region. Pay reparations. We collect $2m per ship.”

Two million per ship would go an awful long way to rebuilding the rocket and nuclear program. And if they obtained that concession through regional terror, it would only embolden the further radicalized regime. Tit-for-tat. Tit-for-tat.

Meanwhile the conflict spreading faster than anyone can treat it.

Saudi putting down a red line. One more strike on energy infrastructure and they go to war. Worth recalling that Saudi also has a defense pact with Pakistan. Which would be quite the turn.

The sectarian geography here matters. Iran is predominantly Shia. Saudi, Pakistan, most of the Gulf: Sunni. The fault lines of this conflict aren't new, but they haven't been this activated in decades.

For the Gulf states, whether they wanted to be dragged into a fight started by Israel or not, they are in one. The damage to Dubai is much deeper than a couple of rockets.

Tax havens are only competitive when they are safe.

The other thing about conflict is the more damage you take, the less you have to lose and the more incentive you have to win. Allowing Iran to threaten them existentially will permanently damage their ability to attract foreign talent and capital.

We talked about this before, four years ago.

This is bigger than Hormuz, though Hormuz is the spot where both sides have something genuinely important to fight for.

Someone woke up Zoltan, apparently Mr Big Picture finally got the memo.

Look even the sell-side has caught on. This is about more than Israel now. Congratulations Bibi, mission accomplished.

Markets

As things deteriorated over the weekend, Brent on Hyperliquid rallied 5% before futures opened and brought it back in line.

Good reminder who the big dog really is.

Saudi may have hedged some of their transportation, but the market is still around 10mb/d short. Whether you want to bet on politics or not, if you are short oil here, explicitly or implicitly, you are making a big bet on peace.

Goldman is starting to price out more sustained supply problems.

Sixty days of Hormuz closure adds $24-42 to the December 2027 contract. Given it was around $60 going in, and given the curve would be in backwardation if that occurred, the front end implies somewhere between $120 and $200/bbl.

Oil has about a 45% flow-through to CPI Energy, which is around 6.4% of the basket.

So a 100% increase in the price of oil would create an inflationary impulse around 2-3% alone, let alone the knock on effects.

The combination of a slower economy and tighter financial conditions has historically been very bad for stocks.

Positioning

Over the weekend, we got our hands on some research on equity market positioning, which more or less confirmed my view. We’ll go through it in depth for subscribers below, but the headline is you can see this tension I laid out above in the positioning info below. Fast money in stocks finally started moving last week, but most folks are either still long, or still holding on to their most prized possessions (the chips, my precious!) and bought some puts (which it looks like the dealers are now finally short making the market more prone to volatile down moves).

Systematic players who target volatility or manage risk parity funds look to only have started to de-risk, and we doubt many of the major real money accounts have started selling. They usually go last, and they usually define the biggest moves. Which then closes the loop we started this piece with.

Yes, a fast money bounce is possible this week on some good news, the Friday post close mini squeeze was proof enough of that. But the real money, the big money is still long, and though it has started selling cyclicals (like financials), most folks are still overexposed to tech, and under exposed to energy. I don’t know about you, but looking around, feels like we might need a bunch more energy infrastructure soon.

Let’s start with the fast money. Commodity Trading Advisors or CTAs, which you can read as ‘guys who trend follow and punt futures’. Depending on who you ask, they have started selling and are either very short (Goldman), or just turning short (DB).

Same with fast money quants.

Sentiment indicators just now moving into bearish territory from strongly bullish just a couple of weeks ago. This is the fading dawn.

If you are playing for a pop, this is what you hope happens. A face ripping relief rally.

As mentioned above, for the past two weeks, the market has felt ‘long vol.’ Meaning dealers (who delta-hedge) had a positive exposure to realized volatility, but act in ways that ironically dampen that volatility, buying when the market sells off and selling when the market rallies. That’s over, and they are moving into short vol territory.

This is backed up a bit by positioning data showing non-dealers are now long VIX as well (which means the street is short).

VIX has performed poorly as a hedge the last couple of weeks as implied vol got juiced at the oil highs and then dragged down along with low realized.

Which somewhat explains the move overnight, with futures opening up much lower, but then rallying quickly as it became clear that oil wasn’t up 5%, and then selling off again. Expect some jawboning tomorrow and one more attempt to push the market above Friday’s close before the real selling hits (is my guess).

Goldman has vol controlled and risk parity funds basically fully allocated to equities. If we start getting realized volatility, they have to sell.

Real money still looks pretty long,

As they continue to accumulate single stocks while selling index as a hedge. This means they are trying to protect their favorite names vs just liquidating out of hand.

Keep in mind, we’re still up a LOT relative to the last couple of years, so a lot of investors in the market have only really lived in ‘buy the bloody dip’ territory.

But the composition of those books is not well positioned for the stagflation that will result from an extended war. You want energy and stuff in an existential fight.

Which is born out slightly by positioning shifts, where energy has picked up but isn’t really buying the front month prices which drive the chart below.

As folks slowly accumulate energy, protect their non-software tech and sell futures, the rest of the book gets sold.

With financials being a good bellwether. We haven’t seen material strains here outside of private credit, but weakness in equity cushions plus losses would start to force people to take a closer look at their allocations. We’re working on our ‘good banks, bad banks’ update and hope to publish it soon.

There are bonds in the stocks.

Bonds in Europe have sold off hard, and now gold isn’t the only thing with a death chart.

Market is beginning to remember the linkages, there are bonds in the stocks, inflation is about oil, if oil rallies, bonds sell off (at least until the damage to stocks is so bad that bonds start to rally but we’re still a leg down before that happens).

And this vulnerability means that bond vol in general is bad for stocks

In spite of the mini rally, dollar positioning isn’t yet extended. This is one to watch as bond yields up could attract capital to treasuries as a value play, but if the liquidity needs go the other way, or Iran gets what it wants, we would see dollar down bonds down.

The Dollar

Which brings us back to where this started.

Iran’s parliament speaker told the world that US Treasuries are soaked in Iranian blood and that buying them means buying a strike on your own assets. This morning there were rockets raining down on Tel Aviv. Iron Dome is struggling with the volume.

Nobody has overtly declared war on the dollar before. Not like this. Not with a specific call for sovereign wealth funds and central banks to dump Treasuries, with a monitoring threat attached.

The market, as of this morning, has priced in roughly a 4% drawdown in equities since this started. The historical median for major oil shocks is 23%. Real money is still long the wrong stuff. Vol-control funds are still near full equity allocation and will be forced sellers when realized volatility picks up, which it will.

My book is positioned for what comes after everyone finishes pretending this resolves quickly. Short credit because the spread compression that made sense in a stable globalized world doesn’t make sense in this one. Long energy because if you are short oil here you are betting on peace, and I’m not ready to do that. Long gold because when a country weeks from nuclear capability, with ballistic missiles already in the air, tells the world to dump your reserve currency, that's not a headline you fade.

The dollar is the whole thing. Come for it and you come for everything built on top of it. The market hasn’t fully priced that yet. It will.

Disclaimers

Charts and graphs included in these materials are intended for educational purposes only and should not function as the sole basis for any investment decision.

These opinions are mine and mine alone and do not represent the views of any of Rose’s clients or counter parties.

The Ramble does take positions in various assets we write about, and views are subject to change without notice.

This letter does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by Rose, Campbell or any other third party regardless of whether such security, product or service is referenced in this brochure. Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

THERE CAN BE NO ASSURANCE THAT ROSE TECHNOLOGY INVESTMENT OBJECTIVES WILL BE ACHIEVED OR THE INVESTMENT STRATEGIES WILL BE SUCCESSFUL. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. AN INVESTMENT IN A FUND MANAGED BY ROSE INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE RISK THAT THE ENTIRE AMOUNT INVESTED IS LOST. INTERESTED PROSPECTS MUST REFER TO A FUND’S CONFIDENTIAL OFFERING MEMORANDUM FOR A DISCUSSION OF ‘CERTAIN RISK FACTORS’ AND OTHER IMPORTANT INFORMATION

Tuesday we started a piece on gold that turned into “Don’t Take the Bait” but tried to message subscribers that things were looking scary.

Wednesday we did a bunch of the analytics and though we got distracted by building systems, tried to communicate to folks that yes, the correction was here.

But that even in yen, the market looked heavy.

Then concluded the day by letting people know we sold some silver against the gold as a way of hedging what looked to be a relatively scary downside.

Which is by no means a way of saying “I told you so”, since I didn’t and I also took losses today. But rather to kind of communicate a) the notion of how fast things are evolving at the moment, and b) provide a bit of transparency on why, towards the end of the day, I took my own advice and cut 80% of the book.

We’re still up on the year, but after paying ~1%+ to get out of some of our less liquid stuff, it comes to a tad over 3%. Which seems fine when you annualize it (up 12% on a 40 vol book isn’t a great year, but also isn’t terrible), but feels painful when we ended January up 14.5% and February up 9.5%. “Drawdowns are gonna happen.”

The primary reason for cutting the book wasn’t so much the drawdown (I actually think it likely that a lot of our miners and AI names will bounce tomorrow and in the coming days) as it became clear to me that I had accumulated way too much drift/bloat over the past couple of months in the good times. Managing a diversified basket of themes with ~200 names is doable when you have risk systems and stare at it all day, it’s a recipe for chaos when you are trading in the parking lot, in between meetings or on the road, with no service.

So, I made three decisions. Time to pare it down. Time to invest in some risk systems. And then, perhaps most importantly for you guys, time to build it back up in a way where I’m not just telling you what I’m doing but kinda teaching how I do it. To get to the point where not only do I feel comfortable with the risk I’m running but take you guys along on the journey of how it’s constructed.

With that in mind, and given the move in the shiny metals today, I figured I’d start where it all began. We’re going to talk about gold. Specifically:

1. What are the bearish things playing out today (free)

2. What are the bullish things playing out with gold today

3. How you might net those as a discretionary trader

Then over the coming weeks, we’re going to extend this into a whole series on how to actually systemize this stuff:

4. What data you can use as inputs

5. How to clean, model and transform that data

6. How you might net that data into what a quant might call a ‘signal’

7. How to use that signal in the construction of a portfolio

8. (Side quest) How to lever that understanding from the underlying commodity to the equities that relate to it (in this case miners)

Why Did Gold Puke Today?

To review, in the 24 hrs between yesterday’s open and today’s gold fell around 10%.

To put that in historical context, that’s another -10z score in 2 months. Remember that next time someone tells you the odds of something happening.

When you see something falling 10z you kind of need a good reason, so the below list may feel uncomfortable, but not many of them were also in play during the January 30 “Warsh puke”:

1. Dollar Strength

2. Higher Rates

3. Scramble for Liquidity

4. Lack of Middle Eastern / Asian Buyers

5. Ugly Chart (aka ‘technicals’) & Reversion of Speculative Flows

Let’s go through them in order.

1. Dollar Strength

The dollar is ripping. DXY back near 100, up almost 5% annualized off the lows. When oil spikes, dollars get scarce globally because everyone needs them to buy energy. This is the same mechanical dollar strength we saw in 2008, 2020, and mid-2022, and every time it happens gold gets hit first because it’s the most liquid thing people can sell to raise cash.

2. Higher Rates

Higher rates weren’t just expected, but for the first time in the oil crisis, they gapped up. When the market opened this morning, US 2 year rates were 60 basis points higher than they were at the end of last month.

This wasn’t just a US story. European rates are now pricing in direct hikes, while the US has a weird curve where SOFR trends up for the next 6 months and then we get another cutting cycle. This is the interest rate curve’s way of telling you how painful this shift in monetary policy is.

If you recall, most other periods of sustained gold weakness came in moments where the dollar was strong and real yields were rising. Like 2008:

Late 2011:

Mid 2013:

March 2020:

Mid 2022:

You get the idea. For gold denominated in dollars, tight dollar (and global liquidity) is bad news.

3. Scramble for Liquidity

So who might be scrambling for liquidity right now?

Well, there’s a lot of folks in the Middle East who, coincidentally, are not only having a hard time selling their petroleum, but are finding a lot of the stuff they use to make that equipment on fire.

As they say “the pain will continue until I no longer post oil & gas rigs on fire in the blog.” This theory is under debate as we have no official confirmation of private or public flows from Gulf countries.

4. Lack of Middle Eastern / Asian Buyers

What we do know is:

Dubai was serving as the primary hub by which gold went from London sellers to Indian and other Asian buyers. That pipe is broken right now. This isn’t a structural shift in demand, it’s a plumbing problem. But plumbing problems can take months to reroute, and in the meantime the marginal physical buyer can’t get their gold.

Iran was also a decent sized purchaser going into the crisis, running at around 100 tons a year (or close to 3% of total demand).

Both of these are war-specific one-offs. They reverse when Hormuz reopens. But right now they’re real, and they’re removing a meaningful chunk of physical demand from the market.

Add in new restrictions on Chinese demand (“Gold in China”) and the pipes for buyers just got much tigher.

5. Ugly Charts & Speculative Flow Reversion

Lastly, the same people who came out of the woodwork at the end of January are now coming out in force, pushing the narrative that not only is gold a ‘bad hedge’ but that, basically, the chart looked crappy and it passed a trend line. This kind of stuff does matter to some extent when you have CTAs (particularly ‘trend followers’ who make investment decisions based solely on charts) moving fast and pushing people through their stops.

So Why Might the Long-Term Picture Be Getting Better?

Read more

Iran’s declaration last week contained two conditions for safe passage through the Strait of Hormuz: a) you are a friend, and b) you are willing to price your oil in CHINESE YUAN.

If you needed clearer evidence that we are in an age of decoupling, and that this is about those that would seek to overturn the world order vs those that seek to preserve it, this is your most clear signal.

When was the last time your side in a war was determined by which reserve currency you used? (Answer: Napoleon's Continental System, 1806.)

This then led to two interesting, somewhat unsurprising, responses.

First, Trump has made an open call for those who would opt into a coalition to reopen the strait. With the obvious dithering by the Europeans. Who feel, yet again, that this is not their fight nor something they should be on the hook for. Funny though, they had the same opinion about Ukraine as well for a while before they started getting drones and missiles skirting their airspace.

Second, the call to CHINA, to see if they would be willing to participate. With the obvious non-answer / no (remember they are too busy trying to suck up as much information about how the US wages war, and test drive their counter systems, to really want this conflict to stop).

Low information folks might see this as flailing, but it’s really an extension of the ‘separating equilibrium’ strategy I identified almost a year ago back in the era of Liberation Day. Sometimes the only way to plan a party is to ask people to help plan it, that’s when you see who your real friends are. Otherwise you end up with a lot of ‘cheap talk’ yeses, a bunch of flakes, and too much guacamole.

What’s unique about this party though is it’s one the Europeans don’t really get to opt out of. Remember the US is an energy exporter. We make the shale. We send the LNG.

We have so much petroleum we don’t burn coal just because it makes us feel bad. Sure we’re a little slow to get going with nuclear (as expected) but at least we don’t have leaders like in Germany saying ‘oh no we turned it off now we don’t know how to turn it on again,’ another in the seemingly endless double speak wishy-washiness coming out of the continent (sorry guys I love you and we need you, you gotta wake up).

Just like with Russia, whether they want it or not, their energy dependence means they are in this game. They didn’t choose the starting clock, but they are on side. If they really want to opt out, they can deal with Russia alone. Time to choose a side. Decoupling is coming.

Lastly, and maybe I’m being a little naive here, there were the overtures obviously being made to Russia right now.

Loosening sanctions on their energy exports at exactly the moment they look weak on the battlefield

and unstable at home.

Maybe there IS a deal to be struck with Russia. Maybe it’s possible to pull them, ever so slightly, out of the Chinese sphere of influence. After all, Vladivostok, the eastern ports, and all that nice farmland is RIGHT there, and oh wouldn’t it be a shame if the conflict in Europe tore them into a hundred pieces and China picked up the best parts of Siberia, which after all, were robbed from them by European colonialism during their century of humiliation.

Call it wishful thinking, but like Germany and Russia in 1940, the Sino-Russo alliance is NOT stable, and wouldn’t it be the ultimate coup for Trump if the conflict in Iran opened up the trade space with Russia to bring them back into the European fold. Not only would it chill out all the WW3 talk, but it would solve Europe’s energy problems, without which their economies might just collapse in a heap of debt and failed promises. Again, call it Campbell’s wishful/delusional thinking (the counterweight to Prof Jiang/Professor Dalio’s end of the American empire vibes) but it’s on the table now.

Is This the End of the American Empire?

Leave it to Ray to come out of the woodwork and try to frame the conflict in Iran in incredibly stark and binary terms. “If the US can’t open up Hormuz it’s the end of the American empire,” basically.

Pardon the text wall, but that’s how I read the following:

Now, I’m with Ray that all this stuff is fundamentally bullish for gold (though the market isn’t acting like it, reasons for which we will explain later), but I’m not 100% with him that this is like the end game for the empire if the US comes away with a couple of bruises.

Seems pretty clear that Ray is talking his book here, literally, the one where he draws a straight line to the end of the American empire. Me, I think the battle for Taiwan is a lot more important than the battle for Hormuz, even though yes, it’s pretty important. Why? Well, what Ray kind of forgets about Suez is that:

1. By the time the UK and France failed to exert their power in the Suez, they had already lost their empires, having sacrificed all their blood and treasure to defeat the other erstwhile empire emanating from the heartland, Germany, and

2. Part of the reason they were powerless in Suez was because the mantle of global empire had already been passed onto their ALLY in those two world wars, which was, also not coincidentally, a Rimland power, the US.

The point here is clear. As we mentioned in our piece this fall, the primary way this leads to calamity for the US is if it gets dragged into a conflict it cannot win in the Heartland. Which, if we're drawing parallels, provides pretty clear advice to policymakers. No boots on the ground. Especially not in the mountainous mainland.

For Ray's historical parallels to work, you would basically need China to come to the rescue of Iran via naval power. Providing anti-air and drone manufacturing power alone will not do (though it seems pretty clear they are doing that too, especially if the reports that a bunch of Chinese radar and drone folks were casualties of US strikes are to be believed, which who knows!).

In a sense (not to say I told you so), we are STILL trapped in an escalatory game of tit for tat, which inevitably metastasizes a zero sum game into a negative sum game (I pay, you lose). These cycles are incredibly difficult to get out of, especially when the most bellicose players are a) in power, b) lacking off ramps, c) possessing a lot of paths to continued escalation in ways that hurt the other but don't disable its ability to continue the fight.

Rimland Wins By Doing Rimland Things.

What Ray and the end-of-empire crowd are right about it that Iran is a Heartland trap.

What they are wrong about is that the US doesn’t have to take it (by setting boots on the ground).

Ray and Jiang’s assumption is that the only way to ‘win’ Hormuz is to go in and physically control it. Boots on the ground. Occupy the strait. Fight Iran on its own terrain, in the mountains, on the mainland. That’s the Heartland playbook, and it’s the one that would actually end the empire, because that’s where empires go to die. Ask the Soviets in Afghanistan. Ask the US in Iraq. Ask literally anyone who’s tried to hold the interior of the Middle East by force.

But the US doesn’t have to play that game. It’s a Rimland power. It has aircraft carriers. It IS the sea. Iran’s whole leverage here comes from strangling one chokepoint. From LARPing as a Rimland power vis-a-vis the Gulf states. Fine. But think about what that actually means for them. They need to export oil too. Their ships are on the water too. Their economy runs on selling crude to China, and that crude has to travel through waters the US Navy controls far better than Iran does.

So here’s an idea: for every ship they mine, for every tanker they hit, for every missile they send at a Fujairah bypass terminal, seize their ships. Not one for one. Ten for one. Every Iranian flagged vessel on the planet is already being tracked. Park the carriers, interdict the tankers. Seize the assets. Then sell their oil. In DOLLARS.

Keep bombing.

Iran gets to play the chokepoint game right up until they realize that the Rimland power they’re poking controls the rest of the ocean. And they’ve already hardened the GCC countries against them by attacking Kuwaiti, Emirati, and Saudi infrastructure. Those were supposed to be neutral parties. Now they’re collateral damage. Every drone Iran sends at a UAE oil field is another country that has no choice but to join the coalition whether the Europeans show up or not.

The real trap is letting the Heartland framing dominate the conversation. Ray sees this as Suez 2.0 because he’s pattern matching to empires that lost control of chokepoints by failing to project power INTO them. But the US doesn’t need to project power into Hormuz. It needs to project power around it. Which is what a navy and all those planes are for. Which is what the Rimland is actually good at. The game theory here isn’t ‘who controls the strait,’ it’s ‘who controls the sea,’ and that one’s not even close.

There’s also a second front that nobody pricing the ‘end of the American empire’ seems to have noticed. Half the reason we are in this mess. This regime just killed somewhere between 7,000 and 36,000 of its own citizens two months ago to stay in power. The largest uprising since 1979, across all 31 provinces, over 200 cities. The only reason it worked was because they turned off the internet. A near-total blackout starting January 8th that cut coordination between protesters and hid the massacres from the outside world. Security forces trapped people in bazaars and set them on fire. Shot wounded survivors in hospitals. Executed people who tried to surrender. Brutal stuff.

The 40-day mourning period is coming, and historically in Iran, that’s when the next wave starts.

The IRGC is the same force doing both jobs. Suppressing a domestic population that hates them AND fighting a naval/missile war against the US and Israel. Every unit firing at tankers in Hormuz is a unit not available to shoot protesters in Tehran. Every missile aimed at a Fujairah terminal is a missile not aimed at its own people.

So flood the country with Starlinks. Tens of thousands of terminals are already smuggled in from the 2022 protests, and they’re the only reason any information gets out of Iran during blackouts. Use airpower to scale that by 10x.

Fund it with the proceeds from seized Iranian tankers if you want to be poetic about it. And if the Kurds aren’t coming to the rescue and the regime is slaughtering unarmed civilians in the streets, then airdrop the people guns.

If the IRGC is going to wage war on its own population, the population should at least have the means to fight back. You can fight a war abroad or a revolution at home. Pick one.

Friend Oil vs Enemy Oil

I’m not sure what happened to the front end of the western oil market (I would not be surprised if some policymakers intervened, selling spot to buy forward, and fulfilling their shorts with flows coming from the strategic stockpiles, seems like a good trade and decent policy), but it seems clear that the abstraction embedded in the question ‘what’s the price of oil’ is yet again being begged into a second question of ‘which one.’

Our call last week that ‘we don’t have confidence in the front of the curve, but the back of the curve is too cheap’ was borne out well (look at me ma, I still got a bit of that oil punter left in me).

Which is a function of folks kind of internalizing that a) there don’t really seem to be a lot of off ramps, b) this isn’t the kind of thing that Trump can just fiat his way out of, and c) Iran has more cards to play than maybe a lot of people thought.

Why the Macro Is Eating Everyone’s Portfolio

Ok, so what does all this mean for markets.

The funny thing about being a macro speculator is it’s simultaneously the easiest and the hardest job in the world.

The easiest because the effective barriers to entry are zero.

The hardest because you are explicitly trying to deal with the markets at the highest level, which means there’s always some new bit of information or data that you haven’t paid attention to, which can (all of a sudden) become a ‘macro risk.’

Hormuz. Liberation Day. DeepSeek. The yen carry unwind. SVB. COVID.The list goes on.

The funny thing about this is that most professional investors take pains to market themselves in opposition to the macro.

“We run beta neutral.” “We chase absolute returns.” “We don’t make bets on politics.”

While there are times, usually around 2-4 times a year, where ‘the macro’ becomes so important in determining market outcomes that not only does it start to drive their portfolio, but it basically makes clear that, yes, after all there was a lot of macro risk embedded in their portfolio.

This is where things like ‘alpha vs beta’ or ‘risk adjusted returns’ came from, since a lot of equity and bond investors were (stealthily) embedding more macro leverage or risk in their portfolios than they admitted.

For example, if you own a basket of 45 vol tech stocks with a high correlation to the market, you might not actually be ‘hedged’ even when you ‘hedge your market risk’ by selling SPUs 1-1 against your portfolio. If your book goes up 3% every time the market goes up 1%, well you are kind of 2x levered the market, even if notionally, you are hedged.

This kind of experience (oopsie, we had more beta than we thought!) then led allocators to start decomposing the returns of their managers into factors. There’s nothing a data scientist with no investing acumen loves more than taking a time series of your returns and breaking it into a million tiny pieces, of more and more degrees of statistical sophistication:

1. “We don’t use correlations to the market, we use PCA decomposition where the first PC is ‘market risk’ and you have too much.”

2. “Oh ok.”

This then kind of bled into the funds that manage a bunch of managers (pod shops and fund of funds) who then started using these tools not only to understand their risk, but ‘control it.’

Which makes for great risk adjusted returns, but also ends up with stretches like the last couple of weeks, where a lot of these managers all end up looking kind of similar.

Why was the beginning of March so tough for folks? Well, in part because a lot of them weren’t positioned for the war (not that you would expect them to be), and in part just due to the kind of volatility we saw at the beginning of last week (was it last week? wow feels like one of those time warps where time slows down and speeds up at the same time).

See, when you are managing a lot of managers, often with ‘tight stops’ (aka risk controls which mechanically reduce risk or even fire them when they lose X%), you kind of guarantee that when you get big market moves, someone is going to hit their stop, and ‘blow out.’ Meaning, in some sense, a lot of these firms are not only chasing alpha, but also ‘short volatility’ (though in a way where they are only short the first x% of the move, so maybe modeled by being short ‘iron condors’ where they make a yield when things don’t move too much, and then lose money, up to a point, when things go wacky. Which if you can get the transaction costs right, is actually a pretty good strategy.

Better than being outright short vol, which at this point you don’t need little ol Campbell to tell you is a really dumb idea (if you aren’t just in it for a quick buck, as most of these managers implicitly or explicitly are, on a long enough time horizon all short vol strategies go to 0).

There’s no ex-macro purists in a war for oil, as they say.

The Impact on AI

But the war doesn’t just threaten your oil book. It threatens the thing everyone is actually long, which is the acceleration itself.

Look, let me be brief. At this point we know we’re in the acceleration, and I still maintain that a) the models aren’t getting exponentially more intelligent (scaling laws are holding, you still need exponentially more compute/energy to get linear increases in intelligence, aka The S Curve Is Here) but they are getting exponentially more useful.

Why?

Well, if you are familiar with my previous screeds about AI you know that my single biggest gripe isn’t with doomers’ assumptions about the path of intelligence (though for all intents and purposes the halting problem and Gödel’s incompleteness theorems appear to be holding, lol) but rather the logical fallacy at the heart of every doomer fever dream:

Intelligence = Power.

Again, all the books, all the articles, the NGOs, the cults, the fanfics, the conferences, the protests, almost all of them are fueled by what is essentially a ‘revenge of the nerds’ fever dream. “I was the smartest kid in high school. I wasn't the most powerful. But one day, if I build something smart enough, surely that will fix it.”

At the heart of this fallacy is something every chad knows: the path to power in high school (or college, or say the ballot box) isn’t intelligence. It’s not even muscles or external validation. At least in high school (and elections) the path to power comes from popularity. It comes from choice. The choice of others to provide you power.

Social power and physical power have been disconnected pretty much since our emergence from the primordial caves, and yes, the transformation has meant that the returns to intelligence are much much higher than when the ‘alpha’ was determined by the guy with the biggest club. But even then, pretty much as soon as we formed bands or tribes, it was ‘who had the most bros.’ Flash forward a couple of million years and maybe it’s not who has the most bros (though as we’re seeing in times of conflict this still matters) but the average person’s path to power comes from the choice of others to yield them power, by choosing to buy their app.

A lot of people bemoan Elon’s path to power, but you have to admit, if no one liked his app, or his car, or his rockets, then he’s not worth much money (something he learned last year, when his attempts to wield political power inevitably led to a backlash on the popularity, and hence profitability, of his car company).

Anyway, so if the models aren’t THAT much more intelligent than they were 4 months ago, why are all the lines going up and to the right?

Well, it’s simple. The combination of a) they got to the point where the hallucinations/intelligence got ‘good enough to use’ and b) they were given power.

The thing you need to realize about Claude Code, or Codex, OpenClaw, or the litany of me-too copycats is that the reason they are impactful isn’t because they are that much smarter than the other bots, it’s because the ‘orchestration environment’ is much much much more powerful.

This is what tech people mean when they say these bots have more ‘agency.’

Agency = power

There is just a massive, massive difference in the amount of damage (in the good sense and a bad sense) that an LLM can do when it’s running inside your computer with ‘dangerously skip permissions’ on than when it’s talking to you through a very narrow and constrained set of text-based, web-hosted interfaces (someone page Alan Kay and Bret Victor!).

The richness of the experience, and the amount of POWER you have given the brain in a box, is something like 10 orders of magnitude more. When it’s just a webapp chatting to you from a server farm, the worst thing a chatbot can do to you is call you a name and hurt your feelings (or maybe retain some embarrassing or incriminating or non-compliant piece of information, which isn’t nothing after all).

Compare that to giving that bot ROOT ACCESS TO YOUR COMPUTER, or read/write access to your emails or text messages or bank accounts.

The models haven’t gotten 100x smarter in the past quarter but they have gotten 100x more powerful, with just enough reliability to be worth it (notwithstanding the occasional ‘omg it formatted my hard drive’ or ‘whoa it texted my wife at 8am under my account’).

So again again again. The next time a doomer lectures you about ‘instrumental convergence,’ remember: the robots didn’t get more powerful because they ‘inevitably sought power to pursue a misaligned objective function.’ They got more powerful because someone gave them a bunch of SSH keys and a ill-defined prompt.

Why does this matter? Why did this rant show up in the middle of a war piece?

Because it explains what’s happening to the thing everyone is actually long.

See, oil just went up a LOT.

Even if peace breaks out tomorrow and oil (and all the other stuff coming out of Hormuz, like fertilizer components, and sulfur and helium) comes gushing back through, we have some inflation coming down the pipe.

Maybe more than breakeven inflation is pricing in (though remember, looking at the front month when the curve is this backwardated is the wrong indicator to peg to breakeven inflation!), and definitely more than folks are pricing into the ancillary markets which will be gummed up with supply chain problems for the next 3 months. This is if things go back to ‘normal’ tomorrow.

Which explains why the bond market went from pricing in a good deal of easing to pricing in a tiny bit of tightening. Even if these supply chain problems wreak havoc on growth, the Fed pretty much can’t come to the rescue.

(Keep in mind the Fed’s reaction function should also be a function of how this increase in energy cost is paid for. As a new friend recently pointed out, the inflationary impact is very different if consumers pay for higher gas by lower spending elsewhere vs by levering up through lowering savings rates. The former is a deflationary impact on all the other stuff, the latter would probably force the Fed to tighten to kill the resulting inflation.)

So What Do You Do

Sooooooo the implication for folks’ portfolios is currently a weird one.

IF we get peace ASAP (which seems less and less likely every day), oil comes back down, the inflation comes out of the system and sure there’s some supply chaos, but it’s basically off to the races, the Fed (and other developed world CBs) can shift to easing and all the bets on AI (which is probably pretty much everyone’s core bet at the moment — another ‘macro bet’ in stock picker’s clothing) will ride out the vol and pay off. Heck, SK Hynix is trading with a sub-6 PE!!!!

But, in a world where this is the beginning, where it’s the final battle, and will take weeks, months, or gasp, years to fully resolve, well that really sucks. Not only because it means we get energy inflation, which means tightening (ugh), but it also means other kinds of cost-push inflation (no helium means less chips, which means less data centers, which means less FLOPs, which means the cost of training and inference just went UP). It actually means a slower acceleration.

Which, if combined with any kind of credit problems (I’m still probably a bit early there folks, I’m usually early), means there’s a chance (a chance!), that the acceleration will be delayed not by the pace of capabilities, or even the power / latitude given to the models, but the very financing of the compute that makes the whole thing go vroom.

On the bright side, outside of the spend on compute and the investments in business process needed for ‘AI transformations,’ the acceleration is deflationary; it should lead to very serious productivity gains. But every day Hormuz is closed raises the prospect that those productivity gains come from firing the workers who don’t use AI, and giving more budget, more spend, and yes more power, to the workers who find a way to use it to become radically more productive than their peers. So that when the layoffs start, it’s clear where the fat to cut is.

If this is all super confusing, welcome to markets, welcome to macro.

The degree to which ‘everything is the same trade’ right now should give everyone pause.

Rather than try to be the hero and call the top or bottom of the oil market (basically impossible), or try to perfectly hedge out all the war/oil risk (also impossible), the implication is simpler than that. Take down risk. Preserve your bullets for when things are actually clear. I see a lot of people right now going into hero mode or trying to craft the perfect hedge while options are expensive and correlations are deeply uncertain. That's not risk management, that's expensive anxiety.

We were going to do a full gold and silver update in this piece, but we’re already 5,000 words deep and I’d rather do it justice than squeeze it into the bottom of this. That’ll be tomorrow’s post. But I’ll let the cat out of the bag: if you think the stock market is being whipped around by contravening forces, paralyzing it, the precious metals markets are in the very weird place where the longer term picture is getting more bullish (more need for currency diversification, more need for alternative stores of wealth, more need for solar panels in a world with rising energy prices), while the shorter term pressures are getting more bearish (dollar strength, higher real yields, a push to liquidity, extended volatility, high correlations with stocks, broken linkages between Indian demand and London metals markets which used to go through Dubai, Gulf capital — private and public — unable to buy, or even selling to make up for lost Hormuz revenue, and ugly charts that look like ‘we are going UP or we are going DOWN, but we can’t stay here’). Deep waters. More tomorrow.

Like any war though, it’s probably going to play out in a lot of unexpected and unknowable ways. Pick your spots, manage your drawdowns (like the pros), and try not to let the outcome be the final battle for your portfolio. I’m taking down risk and keeping my defensive positioning. If this tome makes you feel like you are over your skis, you probably are. Leave the heroics to the other guy.

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It’s March 21st, 2020, the teeth of the covid bear market. I’m at home, trading in my PJs. Having just sold VIX at 68 and up on the year, I post a quick blog post outlining the trade (short call spreads to buy put spreads). It was a decent entry. If it screamed to 80, I was down maybe 2%. If it fell to 30, I was up 4%. Good risk/reward, good timing, good structure.

So why bring it up now?

Two reasons. The first is that I know it can sometimes be difficult, as a reader, to separate my core views from the more short-term ‘punts’. We buy a little oil here, sell a little there, you might not even see the tweet where I close the position. Maybe I don’t!

One of the realities of writing about markets in public is that people start demanding you have an opinion on every tick. I got this a lot in early January with silver after the piece went micro-viral, and you see it constantly across fintwit. People get angry when you change your mind, or they read more conviction into a position than you actually had.

So part of this story is to give you a decoder ring: when I start getting repetitive and annoying about something, that’s when I have real conviction. If you’ve been reading me on Twitter lately, I hope you’re picking up the signal.

Which brings me to the second reason for the pajama story: a couple of days after that VIX trade, I had an investor pitch day. A zoom, but who’s complaining. We went up against a couple of other funds to present our case to a handful of LPs.

And this is where private credit enters the picture.

I’m not sure if it was before or after we did our fifteen minutes, but I remember the exact moment I decided that private credit was going to end in tears. It was somewhere between “guaranteed return” and “never taken a loss” that I started getting that feeling in the back of my neck. Maybe their pitch was just more compelling than the guy ranting about Chinese WMPs. Maybe it was the promise of high returns with little to no risk. But I distinctly remember sitting there, holding my composure, thinking: the next down cycle will come from corporate credit.

That instinct was really an extension of something I’d been watching for years: the rise and eventual overextension of what people called the “Yale endowment model.” David Swensen, rest in peace, had built something brilliant at Yale, and it spawned a generation of copycats. The problem was that by the time the imitators caught on, the strategy had evolved from “gain an edge through illiquidity premium” into “pile the entire portfolio into illiquid, long-duration assets because the reported returns look smooth.”

Which made a lot of sense in 2015 when PE, VC, and private credit were still mid-cycle and rates were still healthy. It made almost no sense in late 2020 and 2021, when the return of ZIRP, combined with a flood of capital into these “private” (read: illiquid and not publicly traded) asset classes, had pushed demand to extremes at precisely the moment when durations were longest and rates were at the lower bound.

If you actually did the forward-looking math, 2018-2021 was one of the worst windows to over-allocate to private equity. Much of what drove the absolute returns of PE and VC was simply the duration of those investments. Sometimes you’re providing liquidity for ten or even twenty years. Which seemed a bit bonkers compared to the guy pitching a portfolio you could cut in an afternoon. And when you deploy capital into PE for a decade, you’re not just locking up your money. You’re also trusting the fund on its marks. You’re also, in effect, buying a lot of bonds, because the risk-free rate is what drives the discount rate on that stream of future cash flows bundled into your PE portfolio. And there we were, a decade and a half past the financial crisis, with rates near zero.

Cliff Asness, the founder of AQR, gave this phenomenon a name I like: volatility laundering. His argument is straightforward: because private assets aren’t traded on public exchanges, the reported volatility of these portfolios was artificially suppressed. The CLO that “didn’t lose money in the financial crisis” wasn’t actually less volatile than its public-market equivalent. It just never got marked. If you never ask what someone is willing to pay for something, you never have to mark it down.

There are features to this approach. Old markets heads will remember the debate over Level 2 vs Level 3 assets back in 2008. Sometimes you don’t want to report day-to-day volatility because it can become reflexive: investors react to down marks by selling, which pushes marks lower, which triggers more selling. Smoothing the ride has real benefits for long-term capital.

But there’s a logical problem underneath it all. If you jam enough debt into anything, even if you suppress the reported volatility, that activity reflexively raises the probability that eventually you won’t just have a bad mark. You’ll have a bad market.

Why Credit Is the Thing to Watch

I should be upfront: I’m not a deep credit analyst. I haven’t done the single-name work to tell you which pipe is going to blow first, or which specific portfolio will be the next Cliffwater. This is a directional macro view, not a bottoms-up teardown. I’m going broad because that’s where my conviction lies, and because the right way to express this trade at scale is through CDS, not HYG puts. Single-name credit default swaps, if you can get the ISDA, are much better instruments for this. (My kingdom for an ISDA.)

But before I get to the evidence board, I want to lay out why credit is structurally so dangerous when it turns. Because this isn’t just about a few bad funds.

The Merton Model and Why Credit Is Short Convexity

Robert Merton figured this out decades ago. Under his framework, a corporate bondholder is economically equivalent to someone who owns the firm’s assets but has written a call option to the equity holders. When times are good, the firm’s assets comfortably exceed its debt, and the bondholder collects coupons without much drama. The equity holder captures all the upside. But when asset values decline toward the face value of the debt, the bondholder’s position changes character entirely. The payoff becomes violently nonlinear. Small additional declines in asset value start producing large losses for the bondholder, while equity gets wiped.

This is what people mean when they say credit is “inherently short convexity.” For most of the cycle, credit looks boring. Tight spreads, carry, low vol. And then, suddenly, it isn’t boring at all.

How Credit Relates to Stocks

Under Merton, equity is a call option on the firm’s assets. Credit is the mirror image. Both instruments are looking at the same balance sheet from different seats. When asset values are high relative to debt, equity is deep in the money and credit spreads are tight. Everything looks fine. But when the debt-to-asset ratio starts biting, both unwind simultaneously. Equity collapses and credit spreads blow out. They aren’t independent risks, and anyone telling you they’ve “diversified” by allocating across both equity and credit in the same leveraged borrower has misunderstood what diversification means.

The Transmission Mechanism

Here’s the pipe. Banks (and endowments) lend to private credit funds. Those funds lend to corporates. Corporates service debt from cash flows. When the economy softens and cash flows decline, or when a catalyst forces actual marks on those loans, collateral values drop. Banks then tighten lending to the funds. Funds can’t roll or extend. Borrowers get squeezed. It’s reflexive from top to bottom.

JPMorgan marking down loan portfolios of private credit groups is step one of exactly this chain. When a major bank starts cutting collateral values on the loans that private credit funds use to borrow against, it restricts the funds’ ability to lend new money and forces them to raise capital or liquidate positions. That’s the mechanism by which defaults mechanically makes money harder to borrow.

The Evidence

The chickens are coming home to roost. Here’s what’s been hitting the tape.

Redemption Gating is Spreading. Morgan Stanley limited redemptions on its private credit fund after investors requested to withdraw 10.9% of capital. Cliffwater’s $33B flagship saw 14% redemption requests, forcing the firm to cap repurchases at 7%. Blue Owl, Blackstone, BlackRock, JP Morgan, Cliffwater. The list keeps growing.

Banks Are Pulling Back. JPMorgan is marking down loan portfolios of private credit groups, which directly restricts how much these funds can borrow. When a bank tells a fund “your collateral is worth less than you thought,” that’s the first domino.

The Managers Are Getting Nervous. Ares held a town hall to reassure staff about market volatility. When management holds an all-hands to tell people everything is fine, things are usually not fine. Meanwhile, the Ares CEO is publicly pushing back against UBS’s call for 15% default rates on private debt.

Europe Is Cracking Too. Goldman Sachs found that around 146 companies in Europe have effectively handed control to their direct-lending funds after they could no longer service their debts. About $38 billion in senior private loans to 150 European companies became troubled, with four going insolvent and the rest restructuring through debt-for-equity swaps. And European insurers and pension funds, which have been among the biggest allocators to private credit, are starting to flag concerns.

Leveraged Loan Prices Are Rolling Over. The Bloomberg US Leveraged Loan Index has fallen about 6% from its highs, with the tech-heavy sub-index dropping even faster. BDCs are trading at ~0.8x NAV, the lowest level since 2020.

Creative Accounting is Emerging. Carlyle reportedly can’t sell its portfolio companies, so it’s securitizing stakes in its own funds and using the proceeds to seed new vehicles. Rubric Capital is telling investors that some private credit firms are using accounting tools to mask leverage. When the financial engineering starts getting baroque, you’re late in the cycle.

The Fraud is Showing Up. GoEasy ($GSY) dropped 58% in a day on a C$178M charge-off, dividend elimination, three CEO changes in 18 months, and admission that its LendCare division was booking payments before collecting them. This is what the tail of a credit cycle looks like.

And the Middle East isn’t helping. S&P has warned that the conflict is beginning to strain credit channels across multiple sectors.

The Analog: 2001, Not 2008

I want to be clear about what kind of credit cycle I think we’re in. This is not 2008. The household balance sheet is in relatively decent shape. Mortgage credit standards have been much tighter post-Dodd-Frank. What we’re looking at is closer to the 2001 corporate credit cycle: a downturn led by overextended corporate borrowers, overbuilt capacity in a specific sector (then telecom, now potentially software/AI/data centers), and a credit market that extended too much at the wrong time.

The good news, relatively speaking, is that corporate credit busts are more manageable than household ones. When households get crushed, it’s incredibly hard to stimulate your way out. People delever slowly and painfully. Automatic stabalizers (read unemployment insurance) prints money and delivers it to people who spend it. With corporate credit, you have more rapid resolution processes (unless you are in China): bankruptcy courts, restructurings, and a faster clearing mechanism.

But here’s where the current situation gets truly uncomfortable: the Fed is boxed.

Conflict is inflationary. Oil disruptions, the latest tanker on fire in Hormuz, put a floor under energy prices and keep inflation expectations elevated. Which means the Fed can’t ease aggressively even if credit conditions deteriorate and labor markets soften. If credit brings us lower while the Fed is pinned by conflict-driven inflation, they’ll be behind the curve in a way that rhymes with the worst policy errors of the last fifty years.

And here’s the kicker that ties the whole thing together: the current growth engine of the US economy is AI infrastructure. Data centers. Massive capital expenditure programs from the hyperscalers and their downstream suppliers. The BIS estimates more than $200 billion in outstanding private credit loans to AI-related companies as of early 2026, representing somewhere between 10-20% of total AI-related debt. That number is projected to grow to $300-600 billion by 2030.

The growth engine is financed by the exact credit market that’s cracking. If private credit tightens, it doesn’t just hit zombie LBOs from 2021. It hits the capex cycle that’s been holding the economy together.

I am not saying credit is a perfect short right now. Timing these things is brutally hard, and I’ve been early before (the silver trade subscribers will recognize the pattern). What I am saying is that if you want to understand the scenario that leads to recession, if you want to understand the transmission mechanism for a real down-market, you need to be watching credit.

Not vibes. Not AI doomer threads. Not unemployment claims.

Watch credit.

Paid Section: The Credit Book

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The strait is basically closed.

The refineries and depots are on fire.

The regime fights on without clear leadership or command and control. Water desalination plants have started to come under attack as the target set moves from military to economic to humanitarian.

We are at war.

The tit-for-tat dynamics we laid out two years ago have fully transitioned to a negative-sum conflict that has sucked in regional players without many clear offramps. Iran lacks any real leadership that could come to the table for a brokered peace. The emerging rimland coalition continues to grow and attempt to strangle the regime. Over the weekend, as the logic of escalation continued to unravel, crude rallied further while equities looked to trade lower. We expect this to continue.

Iran’s strategy of threatening its neighbors, while good on paper, inevitably hardens them. Rather than forcing submission, targeting the water supply of the UAE and Qatar reveals that Iran is willing to deploy the sword of Damocles it had previously only alluded to. For their leadership, the picture is now clear: submit and continue to live under implicit coercion, or lean into the western alliance structure the US has spent decades laying into the region. By attacking the infrastructure that underwrites their economic, social, and financial systems, Iran is making the choice for them.

Equity markets appear to be in a state of semi-denial about the havoc that a sustained squeeze in energy can do to growth, margins, and liquidity. Spot prices for crude and its many derivative products exploded last week, though the move was concentrated in the front end of the futures curve, pricing a rapid return to normalcy. Equities bounced around as if the chaos could be contained to the energy sector.

We are not so sanguine. Over the next week we expect markets to catch on to the following dynamics:

Sustained tightness in energy markets, which had previously priced in a short spout of disruption. As goes energy, goes inflation: higher commodity prices in the materials that take energy as a large input (aluminum, steel), in the intermediate goods coming through the strait like fertilizer (wheat), and in the sulfur-dependent processing chains (copper, nickel). This inflationary impact will put downward pressure on sovereign bonds through higher breakeven inflation.

Energy stocks, which were flat last week because they price off the full curve and not just the front end, should move higher as the entire curve reprices with the destruction of infrastructure and the likelihood of sustained chaos in Hormuz. Lower growth for the states that import material Middle East energy: India, China, East Asia. Central banks paralyzed and behind the curve as breakeven inflation drives yields higher, forcing a choice between easing into inflationary pressure (risking a repeat of 2021) or holding firm while the labor market deteriorates.

Under-appreciated is the reduction in Gulf state current account surpluses that are normally recycled into US dollar assets. The cut in these flows alone will put pressure on previously high-flying stocks.

And credit. As we have said ad nauseam for the past six months: watch credit. The combination of tighter liquidity, lower growth, and higher inflation expectations will put strain on energy- and inflation-sensitive corporates, making it harder for them to roll. This will lead to further deterioration in private credit, which has already shown real weakness in the past couple of weeks. The evaporation of Gulf surpluses adds a second risk-off impulse to this space, threatening to bleed out to the broader market and cut into the aggressive capex plans for data centers.

What follows is our attempt to lay out the mechanics of each link in this chain.

The Oil Tightness Is Real

Oil had its biggest weekly gain since WTI futures were first listed in 1983. WTI closed Friday at $91. Brent at $93. Dubai, the benchmark that actually prices the disrupted Gulf barrels, hit $99. The Strait of Hormuz is functionally closed. Ras Tanura halted after a drone strike. Qatar's Ras Laffan LNG facility paused after a direct hit. Iraq is shutting in Rumaila because storage is full and tankers can't leave. Bahrain's Sitra refinery took an Iranian missile Thursday and is burning. Refineries are being targeted. Infrastructure is being destroyed.

Energy stocks don’t trade on spot. They trade on the 12-to-24 month strip — the average price a producer will realize over the coming year, net of hedges. Airlines work the same way in reverse, pricing the jet fuel curve against tickets already sold. When XLE finishes the week flat while WTI runs 56% from its January start, the equity market is making a bet: this is a spike, the strip won’t follow, realized prices won’t change.

That bet was reasonable on Monday. By Friday, refineries are on fire.

The curve flipped from contango to steep backwardation. Producers rushed to lock in forward sales at the Sunday open. Nearly a quarter of major hedging clients were standing by. Energy stocks had already captured some of the move. Oil ran from $57 to $70 on building tension before the strikes, and XLE rode that anticipation. But the pre-positioning leg and the physical destruction leg are different animals. The first priced risk. The second priced loss.

The benchmark hierarchy confirms it. Dubai at $99, Brent at $93, WTI at $91. The closer a benchmark sits to the disrupted barrels, the higher it trades. Physical scarcity. The Brent-WTI spread compressed today not because Brent weakened but because Asian buyers who can’t get Gulf crude are lifting US barrels as substitutes, pulling WTI up from below. When buyers start rerouting physical procurement, you’ve moved past the risk premium phase.

Goldman estimates a $14/bbl war premium, roughly a four-week halt with pipeline bypass.

JPMorgan has Brent at $120 if the conflict extends past three weeks and storage fills. Deutsche Bank has $200 if Iran deploys mines. Polymarket has a ceasefire by April 30 at 48%.

The options market tells the same story as the futures curve, but with more precision. The risk-neutral density extracted from WTI options shows the 1-month distribution (April) is flat and wide, with 129% ATM vol, a 95th percentile at $157, and roughly a coin flip that oil stays above $90. The 3-month distribution (June) is already tighter and centered around $82. By 6 months (September) and 12 months (March ‘27), the distributions have collapsed to tight peaks around $67-73 with the 95th percentiles back below $120. The further out you look, the more certain the market is that oil comes back down. The strip is pricing reversion. We think the strip is wrong.

Production that shuts in doesn't restart when a ceasefire is signed. Refineries that go cold take weeks to bring back. Infrastructure that takes missile damage takes months. Goldman's four-week framework assumed a transit disruption. What's happening is destruction.

This Is How the Cycle Ends

The economy was already rolling over before any of this.

Nonfarm payrolls fell 92,000 in February against expectations of +50,000. December was revised from +48,000 to -17,000. The last six months averaged zero net job creation. Healthcare — the single consistent driver of payroll growth for the past year — went negative on a Kaiser strike. Federal employment fell 10,000 for the month, down 330,000 from its October 2024 peak. Manufacturing shed 12,000. Information services kept declining.

This was the February report. It does not reflect the Iran conflict at all. March will.

So the starting position was a consumer under pressure, a labor market producing nothing, and an economy that had already posted five months of negative payrolls in 2025 for the first time since 2010. That was the setup before oil went to $91.

Now run the transmission.

Inflation is about energy. Energy is about oil. Oil moves through transportation costs, manufacturing inputs, agricultural production, and petrochemical feedstocks. When oil moves 56% in ten weeks, nothing in the cost structure of the real economy is immune. And it isn't just crude. RBOB gasoline futures spiked across the full forward curve. European gasoil moved violently. Asia JKM LNG surged to multi-year highs after Qatar halted production. Singapore jet kerosene hit levels last seen during the 2022 Russia shock. Wheat is up. Copper is up. Aluminum is up. Every commodity that uses energy as an input or transits the Persian Gulf is repricing simultaneously.

None of this has printed in the inflation data. The lag is 6-12 weeks. The oil move started in late February. The first CPI print that captures it will be April, reported in May. But gasoline prices are already up 30 cents a gallon since Sunday and rising. American drivers feel it before the BLS counts it. For a consumer already spending a larger share of income on non-discretionary items, every dollar at the pump is a dollar not spent at a restaurant or a retailer.

On the corporate side, input costs won’t show up until Q2 earnings. Margins compress across manufacturing, logistics, agriculture, chemicals, and retail. Companies absorb the first wave through inventories. The second wave hits the P&L. Earnings estimates for the back half of 2026 have not been revised to reflect $91 oil, let alone $100 or $120.

Here is the part the equity market hasn’t internalized: stocks do badly in high inflation. Nomura’s data going back to 1946 shows that when CPI runs above 5.5%, the average 3-month equity return is -19%. When inflation is low (below 1.8%), average returns are +34%. The relationship between equity-rate correlation and inflation flips sign: in low inflation, stocks and bonds move in opposite directions, giving portfolios a natural hedge. In high inflation, they move together, and both go down. The 60/40 portfolio stops working. Every asset class becomes short interest rate volatility at the same time.

This is the sequence: energy shock hits consumer spending first through gasoline, hits corporate margins second through input costs, and shows up in the inflation data third. By the time the Fed sees it in the prints, the damage to the real economy is already two months old. And when it shows up, the equity-bond correlation flips, the vol surface reprices, and the diversification that every institutional portfolio relies on stops functioning.

The Fed Is Trapped

Bonds are not rallying. That is the tell.

Bonds are not rallying.

In a normal growth scare, Treasuries go bid. The 10-year falls. The Fed has room to cut. That channel is closed. The 10-year moved above 4.1% Thursday, the 30-year above 4.75%, and the average 30-year mortgage hit 6.13% — rising into a weakening labor market.

The stock-bond correlation has been drifting positive for two years. In an inflation regime, stocks and bonds sell off together because both are responding to the same force: higher rates and rising prices. The traditional safety trade of rotating from equities into Treasuries doesn’t work when the reason equities are selling is the same reason bonds are selling.

Oil is a reliable lead on breakeven inflation, and the bond market knows it. The 1-year correlation between oil and breakeven inflation across the 2yr, 5yr, and 5y-forward tenors has been persistently positive for two decades and is strengthening now.

The 1970s parallel is inexact but the structure is familiar. External supply shock. Inflation expectations start to slip. The central bank caught between a weakening economy and rising prices. The policy mistake is easing too fast, validating the inflation, and having to destroy the economy to fix it later. The Fed already has one 2021 on its record. It will not risk another.

Mary Daly at the San Francisco Fed said it the other morning: “We have inflation printing above target and oil prices rising. Both of our goals are risks now.”

The market is pricing the first cut in July. That calendar assumes the conflict resolves quickly, energy prices retreat, and the March and April data don’t confirm the deterioration that February started. If the strip reprices, if CPI prints hot in May, if the next two jobs reports confirm what February showed — the July cut is gone and the Fed is sitting on its hands while the labor market deteriorates and mortgage rates tick up. That’s stagflation. Not the theoretical kind. The kind where people lose their jobs and groceries cost more in the same month.

Watch Credit

Recessions don’t start because of vibes. They start because of credit cycles.

The Fed being trapped is a necessary condition for the cycle to break, but it isn’t sufficient. What actually kills an expansion is the moment corporate funding costs reprice and companies that were relying on cheap refinancing discover the window is closing.

CDX Investment Grade widened to 58.5 on Friday, up 2.5 points on the day. CDX High Yield hit 350, up 13 points. iTraxx Crossover, the European high-yield proxy, jumped 15 points to 289, the sharpest single-day move since the banking scare in spring 2025. These are not panic levels. They are the levels where credit markets stop ignoring the macro and start pricing it.

The VIX closed at 29.5. The MOVE index (bond market volatility) hit 81, up nearly 7 points. Cross-asset volatility dispersion spiked to levels not seen since 2022, according to Barclays. Stress isn't uniform yet. It's hitting some asset classes and not others, which is what the early stage of a crisis looks like, before correlations converge and liquidation starts.

HYG implied volatility is at 7.4 against a 10-day realized vol of 4.1. The options market is pricing a move in high yield that the cash market hasn't made yet. When implied leads realized by that margin, the next move is coming.

And here's what won't reprice even if we see peace: private credit. BCRED, Blackstone's flagship private credit fund, is at 97.65, barely down. CLO AAA tranches (JAAA) are at $50.37, near their all-time high. CLO equity (CLOZ) sits at $25.54. The senior loan ETFs (BKLN at $20.36, EMCLOUD at 1435) haven't moved either. Private credit marks are lagged by design. The NAVs update monthly or quarterly, and the underlying loans are marked by the managers who originated them. HYG reprices in real time. BCRED reprices on a spreadsheet cycle.

The transmission runs like this: the energy shock compresses margins for companies that were already operating at the edge of their debt covenants. Higher input costs meet weaker revenue. Cash flow deteriorates. Lenders tighten. Refinancing rates — if the Fed is pinned by inflation — don’t come down. The companies that loaded up on floating-rate private credit in 2023 and 2024 because it was cheap discover it isn’t cheap anymore, and the exit door is narrow because there’s no secondary market.

CDX is starting to move. HYG options are pricing the next leg. Private credit hasn’t flinched. That sequencing is how every credit cycle plays out: liquid markets reprice first, illiquid markets reprice last, and by the time the illiquid marks catch up it’s already a crisis.

More on this in an upcoming piece. For now: watch credit.

The Trade

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You may have heard the phrase “everything is a bank.” I’m not sure of the etymology, because when I first started spouting the principle it felt like some kind of unique creation. Most likely it’s one of those truisms that was hanging in the air.

In my defense, it was back in 2023 when I first wrote the ramble “Twitter is a Bank” with a pretty clear synthesis.

The core requirement for being a financial institution is understanding your customer’s identity. If money is about trust, banking is about identity.

Who better to track, understand, and manage your monetary identity than the technology companies which already manage your online persona, already do KYC, and are already considered trusted counterparties for your financial records?

Just like PayPal bootstrapped by giving people money, the X creator rewards program was the first step to building those digital rails. Via Stripe, they started gifting prominent accounts five figures a month. With that in mind, it wasn’t a stretch to think about the ways all major tech companies end up providing the financial services essential to banking. Starting with payments and clearing, moving to holding balances and extending credit, and finally becoming a system of record for the “state” that is your accumulated assets and liabilities.

The origin of this theory goes back to maybe 2017. I was still pretty fresh out of the markets, working through the arduous process of setting up my own fund. My research on financial panics took me to the Knickerbocker Trust crisis of 1907, where a trust — back then essentially a corporation or holding company — had gone under and created a scramble for liquidity that started a bank run, rapidly taking out many leveraged institutions. There were echoes of the Overend, Gurney & Co. crisis of 1866, where discounted bills and short-term credit instruments — what we’d now call shadow banking — nearly brought down the Bank of England itself.

At the time of the Knickerbocker panic, the US had no central bank (thanks Andrew Jackson, thanks Thomas Jefferson) and so there was no public lender of last resort to step in and quell the markets by providing liquidity to mop up distressed assets and recapitalize failing institutions.

Enter JP Morgan’s library.

This is right around the peak of Morgan’s ascension. He had come of age as financial institutions morphed from quasi-investment partnerships into corporate empires, and the trust vehicle was the instrument of the era. Morgan had used it to restructure and consolidate the railroads (notably the Northern Pacific and Erie lines), to underwrite the formation of US Steel and General Electric, and to bail out the US Treasury itself in the gold crisis of 1895. Straddling financial advisor, credit provider, and book runner for many of the major deals at the turn of the century, Morgan was as close to a one-man central bank as America had ever produced.

So as everyone looked to JP for leadership, he looked at the market. Seeing a classic collective action problem, he did something kind of hilarious. He invited the heads of the major banks to his home library and locked them in. All night. Until they came to an agreement, written on a small piece of paper, for who was in and for how much.

A deal that put a bottom on the markets. Not so far as “whatever it takes.” But what was necessary.

A couple of years later, sufficiently scarred, Congress passed the Federal Reserve Act of 1913. The US was well on its way to leaving the gold standard, with two world wars and a depression serving as instrumental accelerants along the way.

So what does any of this have to do with X?

When I heard this story, I started digging for documentation and came upon the fact that the Morgan Library (as it is now called) actually had records. A lot of records. Records they’d let you examine and photograph if you had the right intention. So I filled out my forms, dutifully answered their emails about the purpose of my visit, and a couple of months later had an appointment to come take a look — under supervision, of course — at a set of documents.

I was giddy with anticipation.

When asked which records I’d like to examine (since they’d have to retrieve them ahead of time), my answer was immediate. Everything around the Knickerbocker Trust crisis, and the earliest documents in the firm. The founding documents.

What did I find?

Someday I’ll track down the phone with the actual photos (I think the battery died a couple years later, so it’s a bit of a deep recovery project at this point) to share them with you, dear reader. But there were two things of note.

The deal that put a floor under the Knickerbocker Trust crisis was, essentially, a napkin. Not a literal napkin, but a smallish piece of paper with the commitments from the major financial houses for their contribution. $10 million from JP. $10 million from so and so. $1 million from so and so. A simple list of names and numbers that added up to enough to stop the bleeding.

Perhaps more interesting were the founding documents of the firm that now trades on the NYSE under the ticker JPM. It was a simple ledger, along with some papers explaining that Mr. Morgan was rolling the remaining assets from a prior partnership where he’d been a junior partner as his contribution into the new firm, along with four partners. Someone put in cash. Another fellow put in a deed to some estate his family acquired in England in the 17th century. This is what they mean when they say “real money” investors, if you know what I mean.

My favorite part of the anecdote is that this simple ledger of debits and credits was essentially the first couple of rows of a spreadsheet that goes all the way to today. You can think about the origins of that trillion-dollar empire as going back to that handwritten book. A single continuous portfolio with trillions upon trillions of transactions, payments, and asset transfers, which continues to this day.

Which, dear reader, brings us to our point. If that 150-year-old book is the world’s biggest bank, what does X or Google or Apple look like in 100 years? How far along that path are they now (surprisingly far) and how can we expect this to evolve?

That’s the point of today’s ramble. Not just “I told you so,” though that is of course also kind of fun.

Banks vs Tech

The top 25 global banks had a combined market cap of roughly $6.1 trillion at year-end 2025. JPMorgan, the direct descendant of that handwritten ledger, sits at about $915 billion.

Nvidia alone is $4.5 trillion. Apple: $3.95 trillion. Alphabet: $3.83 trillion. Microsoft: $3.53 trillion. Two of these are worth more than the entire top 25 banking sector combined.

Banking trades at about 1x book (meaning the market cap of the stocks trade at around the balance sheet book value of the equity aka Assets-Debt), trailing all other industries by ~70%. Despite record revenues of $5.5 trillion and net income of $1.2 trillion in 2024, capital markets are usually skeptical about banks’ value creation. Why?

Well, partially. As leveraged entities, banks have a history of going poof in periodic financial crises. But partially because folks are implicitly pricing the fact that over long periods of time, their lunch is going to be eaten. By smaller financial institutions that grow up around the periphery in less regulated or oligopolistic markets (think Polymarket, think Coinbase). And increasingly by tech companies that aren't explicitly financial but become financial over time.

Examples of the financializationof tech cos:

• Apple: Apple Card, Apple Savings, Apple Pay, Apple Cash

• Google: Google Pay, Google Wallet, payments across Android/YouTube/Play Store

• Amazon: Amazon Lending, Amazon Pay, credit card with Chase, BNPL

• X/Twitter: X Money (payments license), X debit card (Visa), creator payouts

• Meta: tried Libra/Diem (killed 2022), Meta Pay, WhatsApp payments in India/Brazil

• Shopify: Shopify Balance, Shopify Capital, Shopify Payments

• Uber: Uber Money, debit card, instant driver payouts

These tech companies already have your identity. They then move into transaction flow. Then they lever their data to underwrite risk/credit and voilà, they aren’t becoming banks. They already ARE banks.

They just don't file call reports (the quarterly regulatory filings that make you officially a bank) with the FDIC.

Morgan had the railroad barons and the trust companies. Today’s equivalent is the platform with a billion users who’ve already handed over their government ID and built a decade of transaction history. The ledger just got bigger.

The Identity Gate

To operate in the world of dollars you need identity. KYC, "know your customer," is the price of admission to every regulated financial market on earth. Property rights, contract enforcement, legal standing, all of it assumes there's a person on the other end of the wire. Dollar-denominated finance runs on verified human identities, all the way from the Fed wire down to your mortgage lender.

The regulatory stack enforcing this:

• Bank Secrecy Act / AML: KYC for every US financial institution

• Dodd-Frank: systemic risk oversight

• PSD2/PSD3 (EU): open banking, payment services regulation

• Basel III/IV: bank capital requirements globally

• State money transmitter licenses: what X, PayPal, and every fintech hold to move dollars. The first step on the payment processor to bank rails pipeline

Meanwhile the digital identity infrastructure is getting more robust, not less:

• EU eIDAS 2.0: digital identity wallets across the EU

• India Aadhaar: 1.4 billion biometric IDs, backbone of UPI

• Mastercard: replacing card numbers with tokenized biometric identity by 2030

• Worldcoin/World ID: biometric iris-scanning UUID at global scale

This is where my other rant from 2023 comes in, “How to Regulate AI.”

While doomers were panicking about parameter counts. My argument was simple: until machines become legal persons, liability flows back to the humans who set them in motion. The real regulatory infrastructure is personhood, not compute caps.

The proliferation of AI ‘agents’ makes it more salient. As agents proliferate, “is this a human?” becomes the most valuable question in finance. The more capable the machines get, the higher the walls around human-verified financial infrastructure need to be. The more you need to really know it’s a human on the other end of the line. Something X has been grappling with a lot lately.

The World of Dollars vs The World of Crypto

Two financial worlds.

The World of Dollars is where humans live. KYC-governed, nation-state regulated, court-enforced. Where the big assets sit:

• Global real estate: $393 trillion (Savills 2025), ~4x global GDP

• Global bond markets: ~$130 trillion

• Global equities: ~$100-115 trillion

• All the gold ever mined: ~$20 trillion

The descendant of that 17th-century English estate deed that Morgan’s founding partner threw into the pot. Still almost entirely off-chain. Almost entirely human.

The World of Crypto is where machines can play. Total market cap ~$2.4 trillion. About 0.6% the value of global real estate in what’s called “Real World Asset” linked crypto. But the market cap understates the infrastructure. Crypto rails offer machine-speed settlement, micropayments, programmable transactions, and operation without identity verification at the base layer. An AI agent can hold a wallet, sign a transaction, and settle in seconds. No KYC required.

This isn’t theoretical. The agent financial infrastructure is being built now:

• Coinbase Agentic Wallets (Feb 2026): first wallet infrastructure for AI agents. Autonomous spending, earning, trading. Deployed via CLI in under 2 minutes.

• x402 protocol (Coinbase + Cloudflare): machine-to-machine payments standard. 50M+ transactions. Named after the HTTP 402 “Payment Required” status code that was planned but never implemented. Now it is.

• MoonPay Agents (Feb 2026): non-custodial AI wallets, automated trading and fiat on-ramps

• Stripe: x402 support for USDC-based agent payments

• Coinbase Payments MCP: letting LLMs like Claude and Gemini access blockchain wallets directly

What agents are doing with the money: monitoring DeFi yield rates and rebalancing at 3am. Paying for compute per-request via stablecoins. Negotiating agent-to-agent data purchases in 200-millisecond cycles. Theoriq Alpha Vault runs $25 million in TVL managed entirely by autonomous systems.

AI is bullish for crypto because autonomous agents need a financial system that doesn’t require them to be human. The dollar system demands identity. Crypto doesn’t. Billions of agents executing billions of microtransactions need permissionless rails. There is no alternative. For now.

Stablecoins are the bridge.

USDC is already the settlement layer for Coinbase agent wallets and Visa’s network, which supports over 130 stablecoin-linked card programs in 40+ countries. The GENIUS Act, signed July 2025, let US banks issue their own stablecoins. Forecasts have the market at $500 billion this year, $2-4 trillion by 2030.

So the machine-native financial layer is real and growing fast. But the vast majority of valuable assets remain off-chain. $393 trillion in real estate. Trillions more in private equity, infrastructure, sovereign debt. All under legal frameworks requiring human counterparties, governed by courts that only recognize legal persons. An AI agent can trade an ERC-20 token in milliseconds. It cannot buy a house. It cannot enforce a contract in Delaware Chancery Court.

Not yet..

The tokenization crowd is working on this. BlackRock has a tokenized Treasury fund on Ethereum. The ECB is piloting DLT-based settlement with central bank money, Pontes track launching Q3 2026. But total value tokenized is a rounding error against $393 trillion in title-and-deed infrastructure.

That’s the equilibrium. Bots play in the crypto sandbox. Humans hold the real assets. Every point where the two worlds touch requires KYC. The identity gate is the bridge, and it’s getting more fortified, not less.

This holds until one of two things happens: enough real-world assets move on-chain that the distinction blurs, or machines gain the legal standing to own and enforce property rights at scale. The second is a political decision, not a technical one. Both are brakes in the financial singularity.

The Brake in the Machine

This is where the doomers get it wrong.

The standard AI risk narrative conflates intelligence with power. Sufficiently smart system exceeds human capability, automatically accrues resources, reshapes the world. Foom.

That’s not how power works. You need identity to open an account, standing to file a lawsuit, title to own property. Intelligence alone doesn’t grant any of these.

Morgan understood this. He wasn’t the smartest man in that library. He was the most connected. The napkin worked because the names on it had legal standing, assets, reputations that could be destroyed if they reneged. Power was in the network of enforceable obligations, not in any one man’s intelligence.

Same principle for machines. KYC, identity verification, property rights: these aren’t bugs. They’re natural chokepoints, and exactly the right places for regulatory gatekeeping. Even Coinbase’s Agentic Wallets ship with spending caps and compliance screening. MoonPay requires human identity verification before any agent can transact. The builders already know the identity gate is the control layer.

You don’t need to solve alignment to keep machines contained. You need to keep the identity gates closed. Routing around property rights means routing around the legal systems of every sovereign nation simultaneously. That’s not an intelligence problem. It’s a power problem.

Where This Goes

So where does this leave us? A layered financial system. Human-verified identity for major assets. Crypto rails for machine-to-machine finance. The two layers meet at regulated on-ramps, and the companies that own those on-ramps will capture outsized value.

The regulatory question everyone keeps asking is “how do we control AI?” Wrong question. The right question is “who gets to pass through the identity gate?”

Morgan’s napkin was just a list of names attached to commitments. That was the technology of trust in 1907. Today it’s biometric scans and blockchain wallets. The medium changes. The principle doesn’t.

Banking is identity. Tech companies own identity. All tech companies are banks. The only question left is whether you’re long the gate or long the sandbox.

I know which side I’m on.

The Implication

The thesis is simple. Banking is identity. Tech companies own identity. All tech companies are banks. If you believe the financial system is bifurcating into a human-verified dollar layer and a machine-native crypto layer, you want to own the companies that sit at the gate between the two worlds and collect a toll on every crossing.

The lazy way to do this would be long tech XLK short financials XLF but over the timeframes we’re talking about you end up with too much other stuff. for a bit more concentrated version, you want the tech companies that are in the process of transforming into banks right now, or who gate keep an essential part of that transition (for humans or agents).

Three core longs. One honorable mention. One short.

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Dollar up

Stocks down

Gold down

Copper down

Silver…murdered

This is where it gets real for people.

Whether or not the strait is officially closed, Iran’s strategy of lashing out at everyone and anyone around them is now clear.

Impose maximum pain on the region in order to bring diplomatic pressure to bear on the US (and by association Israel) in order to buy time to refit, rearm and readjust to the new reality.

As discussed in previous rambles ad nauseam, the key problem with this strategy is that it commits to negative sum games in a way that inevitably pushes them further and further away from the ‘reasonable middle.’

When it was a sovereign state trading missiles with another sovereign state, Iran had the benefit of the doubt, as well as ‘international law’ as well as the sneaking suspicion by a) many of the global/European elites, and b) the China/Russia axis, that Israel has disproportionate power relative to their station, and so they could cast themselves as the sole brave regional power willing to stand up to the bully. The irony of a country of 9m bullying a region of 100m+ hostiles notwithstanding.

Then they started killing civilians. Lots of them. Somewhere between 32k and 60k depending on which media you trust (which at this point should be pretty much no one).

By attacking Saudi and the other Gulf states, Iran has ultimately failed in the goals that by my measure kicked off the original October 7th attacks: derail ‘normalization’ of relations between Saudi and Israel via the Abraham Accords. A deal central to the development of an “India-Middle East-Europe” corridor that just so happened to link the two regional rivals and provide a trade link that avoided Iran and the Belt and Road. The irony is that by threatening Gulf security directly, Iran has arguably accelerated the normalization it sought to prevent, giving Saudi a concrete security rationale to deepen partnership with Israel and the West.

As is so often the case in war, this negative sum thinking has inevitably turned the recipients of this animosity against them, and we’re seeing oil production and transportation slow as Saudi and the Gulf States gear up for direct conflict with the regime.

For the Gulf states, this conflict is almost as existential as it is for the mullahs in Iran. Their pitch, for the last two decades, was as bastions of safe, relatively free and luxurious living in the heart of a war torn region. Dubai real estate being the best example.

This pitch isn’t nearly as attractive when folks realize their hideaway is just a drone’s throw away from a suicidal regime.

At this point, the regime’s only friends are a) customers for its oil (China), b) geopolitical allies who don’t seem in a rush to get directly involved (Russia and North Korea), c) various extremist groups, and d) western leftists/liberals who will take any chance to protest Trump’s moves.

Along with the escalation from ‘strikes’ to ‘conflict’ to ‘regional war’ the markets have begun to take notice.

What we saw this morning was the telltale signs of a ‘de-risking event’ where pretty much anything that wasn’t oil or a dollar bank account started to get puked. Classic ‘scramble for liquidity’ perhaps best evidenced less by stocks (which you could also chalk up to the impact from higher energy prices and/or deteriorating growth conditions) but the sell off in precious metals and the surge in the dollar.

Gold (in dollars) falling as folks liquidate their recent winners. Korean favorites like SK Hynix down more than 12% overnight as people look at the chart and go ‘eh, get me out.’ This is what I call the ‘regret’ trade, as people who didn’t appreciate how real the conflict was reprice their book and start thinking about what it means if this lasts more than a news cycle.

Well, as we said yesterday, the real drivers of oil will be whether production facilities are targeted (check) and whether the strait was grinding to a close (check).

This is where looking at the futures curves helps.

Ironically, this morning US Crude deliverable in December 27 was DOWN on the day.