The Regret Trade

Oil and Dollars Up, Everything Else Down

Oil up

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 precious metals.

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.