The Problem With Relative Value

I am assuming I will do a Fed preview on @Livesquawk’s podcast Wednesday. https://x.com/LiveSquawk

The reason I love relative value trading is that it is comforting to know I am “buying something that is low, versus selling something that is high.” Over enough time, I expect to eventually make money. The reason I hate relative value is that from time to time, there is an event (like a war) where everyone is scrambling out the door to get rid of positions, regardless of whether there is value or not. One simple example of a mass exodus is gold, which was down 6% since the war started, even though it is supposed to be a safe haven. I discuss how the unraveling of some relative value trades occurred from the recent events.

But first the long week in news:

· Mojtaba! The new Iranian leader is the son of the former leader… except he is even angrier because we killed his dad, wife, other family and friends. Not Delcy, but a scorpion. I assume we will be playing Whack a Mole for the near future.

· TACO time! I distinctly got the impression that Trump would be open to some kind of agreement, but not unless it doesn’t look like a TACO. Iran also seems to be open to a deal, on their terms. For now, neither side looks like they want to move. The next catalyst could be when escorts across the Hormuz starts. Depending on the success or failure, we could see movement in one of the bargaining positions.

· It is clear Trump’s “Concept of a Plan” did not involve the possibility of Iran closing Hormuz. I can accept Trump being a doofus (because you don’t get angry at a mentally challenged person), but what is the deal with our military? What happened to studying Sun Tzu at the academy and “know your enemy”? I’ve had no training but have been talking about the Scorpion and the Frog for two weeks now. I can only assume Trump/Hegseth overruled someone. But this doesn’t explain why demining ships were back in the US or we didn’t fill the SPR before starting. It’s going to take “weeks” to set up escorts because the required ships for demining and escorting need to travel across the globe. I’ll be curious to see how the markets handle the uncertainty until then.

· Trump is “hoping” other countries will send ships for escorts. I did not realize “hope” was a strategy they taught in the military. I hope Trump treating our allies like crap for over a year isn’t going to come bite us in the ass.

· I’m not sure to what extent escorting is going to help in this environment of cheap aerial and naval drones. You can literally send drones from ANYWHERE within a few hundred miles. This is modern guerilla warfare. #Vietnam2.0? The mountains are the new jungle. I hope we are awaiting some kind of secret drone jamming device. Otherwise, the fighting will be asymmetric.

· The success of the escort program will drive the oil price and determine on whose terms peace will occur. The disaster scenario for the US would be if the escorts are not successful in restoring at least half of the former traffic, while a humanitarian crisis develops in Iran.

· There are all kinds of headlines that Iran letting small amount of tankers through (Indian, Chinese, etc). I guess it couldn’t hurt to let a few through, but doing so removes some of the tail risk of an oil spike. Allegedly Hormuz accounts for 20mb/d. Saudi’s new pipeline capacity takes 6 of that off, the EIA SPR releases take another 3, maybe you squeeze out some more from existing fields and conservation. After all the adjustments, you get to less than half of the Hormuz flow that is restricted. So barring some attack in the Red Sea or damage to the Saudi pipeline, Iran can’t be letting too many ships go by, if they intend to keep the world hostage.