Outs
In poker, when you are behind on a hand, the cards left to be played that can still give you the best hand are called “outs.” My central view on the War is that the impasse lasts longer than shorter. However, what makes the current War difficult to trade is that Trump has the power to quickly change from the status quo – for the better (towards a deal) or worse (escalation). In particular, he has a number of outs to get out of the current Iran mess. And at least one of the outs can be implemented at any time, which makes aggressive positioning challenging.
But first the week in news:
· Rubio said the “US doesn’t need China’s help” [with Iran] after the first day of the China summit. Let’s try a hand-reading (aka critical thinking) exercise. What is most likely to have elicited such a comment from Rubio?
o The US didn’t ask China for assistance regarding Iran, since everything is under control and we don’t need their help (as stated). But somehow China mentioned they would stop sending weapons to Iran and stated that they opposed tolls on the Hormuz.
o China offered to give naval, logistical and intermediary assistance, but we declined, since we didn’t need China’s help (as stated).
o We asked for help and Xi said, “xiongdi, ni zhen can” (Translation: “it sucks to be you, bro”) and offered us nothing.
That’s right! Only the last one makes sense, unless you are still wearing the MAGA hat that is two sizes too small.
· From the Macro Voices podcast, and my own musings last week, it appears that some in the markets were uncertain if China would be a material participant in the peace process. It appears not, and that may have contributed to…
· We had a massive bond market selloff, as SOFR futures sold off up to 30.5bps on the week. Global bonds all puked, as technical support broke down. Inflation data in many countries (including us) rose more than expected.
· Trump put gas on the fire by suggesting no federal gas tax. That’s a very thoughtful gesture ahead of elections, but the bond markets read that as “fiscal irresponsibility.” The bond vigilantes have been awakened! If only something could be done monetarily…
