Straight to $120: The TACO Trade Returns

Posted on June 15, 2025 by macromon

In 30 minutes, crude oil futures will flicker to life, and this isn’t just another session. With tensions between Israel and Iran hitting kinetic levels, traders are watching the Strait of Hormuz like it’s the Nasdaq in March 2020. One headline from Tehran and the whole thing re-prices. Fast.

Straight of Hormuz

Let’s not forget where we are: the Strait of Hormuz is the world’s oil aorta. Two narrow shipping lanes, 21 miles wide — Iran to the north and Oman to the south– carrying nearly 20.5 million barrels of crude per day, about 30% of all seaborne oil. If the global energy market has a single point of failure, this is it.

And Iran knows that. They’ve known it for decades.

Historical Context: Tehran’s Favorite Pressure Valve

Iran has used the Strait as both shield and sword.

  • 1980s Tanker War: Iranian and Iraqi forces attacked over 400 tankers, dragging in the U.S. Navy. Operation Earnest Will turned the Gulf into a Cold War naval theater.
  • 2011–2012: As sanctions piled up over Iran’s nuclear program, top generals threatened a full closure. Brent jumped, premiums widened, and war-risk insurance exploded.
  • 2019: In response to U.S. withdrawal from the JCPOA, Iran didn’t close Hormuz—but it did detain tankers, mine the waterway, and use drones on Saudi facilities. Brent surged $10 in a matter of hours.

Notice the pattern? Full closure isn’t necessary. Tehran only needs to look serious.

From Threats to the “Taco Trade”

Now we’re hearing traders talk about the “Taco trade” again—only this time, it’s less “Trump Always Chickens Out” and more “Tactical Action, Crude Oil.” But don’t discount the political pressure valve: a spike to $120 per barrel could put the “fear of Allah” into Trump and force his hand toward de-escalation. For Tehran, the bet is simple—weaponize oil, drive markets into a panic, and make Washington blink.

It’s the idea that Iran, boxed in by regional war and domestic unrest, will use crude prices as a bargaining chip.The setup:

  • Hint at closure
  • Launch a proxy drone or detain a tanker
  • Send Brent up $30–$50 in a week
  • Let the West sweat, while Tehran tightens its grip on negotiations

Iran is considering closing the Strait of Hormuz, Iranian news agency IRINN has reported, citing key conservative lawmaker Esmail Kosari, as the conflict with Israel intensifies. – Al Jazeera

This isn’t an oil trade—it’s a geopolitical hostage negotiation wrapped in barrels.

What the Tape’s Telling Us

We’re already seeing stress on the curve.

  • Brent in backwardation, meaning the market is pricing tight near-term supply.
  • Options market loading up on $85–$100 calls.
  • Tanker insurance costs have doubled.
  • API and EIA data showing steep inventory draws.

And crude hasn’t even opened yet.

What to Watch in the Next Hour

  • Any fresh intel on tanker disruptions = +3–5% price pop
  • Western or Gulf military response = volatility spike
  • Diplomatic olive branch = profit-taking, but elevated floor

This is the Taco moment—if Tehran pulls the lever, every macro desk from London to Singapore will pivot from equities to energy.

Final Thought: The Strait Is the Strategy

Iran doesn’t need to win the war. It just needs to raise the price of fighting it.
And that price? Measured in barrels.

Crude opens in 30. The Strait of Hormuz may already be priced for peace. But one fast boat, one drone, or one headline from the IRGC—and the whole tape rerates.

This isn’t about oil anymore.

It’s about leverage. And Iran still has plenty.

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Happy Father’s Day!

Posted on June 15, 2025 by macromon

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Global Risk Montior: Week in Review – June 13

Posted on June 14, 2025 by macromon

This week presented a paradox that seasoned portfolio and hedge fund managers will recognize immediately: risk is rising, but price action remains oddly composed. With geopolitical tensions escalating in the Middle East, oil surging, and inflation data surprising to the downside, equity markets continued trading with a deceptive calm, masking deeper structural vulnerabilities. Behind the headlines, the mechanics of the market tell a more precarious story: asset managers appear to be increasingly short of their benchmarks, systematic and discretionary shorts remain crowded, and positioning seems light after months of defensive hedging. As we approach Monday’s open, it may serve as a key inflection point where positioning, policy, and geopolitical risk converge.  Nevertheless, beneath it all, the AI trade remains as the secular theme and trend underlying driver of markets, in our opinion.  

Geopolitics and Risk Sentiment: Asset Markets Shrug—for Now
Despite Israel’s direct military strike on Iranian nuclear sites and Iran’s retaliatory missile fire, financial markets barely flinched. Crude oil, however, jumped over 7% on Friday, settling at a four-month high, and gold briefly rallied. However, equity markets, including the S&P 500 (-0.39% for the week) and Nasdaq (-0.63%), showed minimal reaction. However, as Iran’s missiles fell on Tel Aviv late in Friday’s trading session, equities began to wobble with the S&P 500 closing below the key 6,000 level.  According to Barron’s, even traditional risk havens such as the dollar and Treasurys saw muted inflows. The message? Investors are treating the latest Middle East clash as a headline risk rather than a macro driver, at least for now.

This complacency belies the risk of escalation. A disruption to the Strait of Hormuz could send oil prices beyond $120 a barrel, which would sharply reprice inflation expectations and destabilize rate outlooks. Strategists from Barclays and T. Rowe Price caution that the current market narrative, pricing in disinflation and Fed cuts, is vulnerable to oil-induced shocks.

Positioning Dynamics: Short Exposure at the Core
The price action doesn’t reflect fear, but it does reflect fragility. Major institutional portfolios remain underexposed to equities. According to data from Manulife and Schwab, large active managers are significantly short their benchmarks, with many hedge funds maintaining net short exposures. Systematic funds, having reduced risk throughout Q2, are underweight equities by the widest margin since 2022.

That leaves markets highly sensitive to squeezes and reactive flows. Friday’s bounce in oil and slight bid in equities may not reflect conviction, but rather a short-covering reflex. Monday’s open becomes the critical test: if geopolitical risk deepens or oil pushes higher, the pain trade could swing in either direction, either a risk-off cascade from re-leveraged volatility funds or a violent rally if shorts are forced to unwind into low liquidity.

Macro Fundamentals: Mixed, Not Assuring
CPI and PPI both came in below expectations, offering temporary comfort. Core CPI rose just 0.1% MoM and 2.8% YoY, reviving bets on Fed rate cuts later in 2025. FOMC members are likely to stay cautious, however, particularly given the risk of second-round inflation effects from energy. Powell’s upcoming press conference and the Fed’s Summary of Economic Projections will likely reinforce the narrative of “higher for longer with optionality,” keeping duration markets on edge.  The market is pricing in a 99% probability the Fed does nothing at this week’s FOMC.

Treasury yields fell through most of the week, but rose Friday as the oil spike unsettled rate expectations. Jamie Dimon’s warning that the U.S. bond market is on track to “crack” under the weight of rising debt should not be dismissed. With the deficit now structurally over $1.5 trillion, and tax policy still used as a blunt political tool, the bond market’s patience is thinning.

Policy and Political Volatility: Structural Risk Rising
Behind the immediate headlines, a more concerning trend is reemerging: the growing influence of erratic policy as a macro variable. Trump’s tariff and trade threats, including a fresh proposal to tax EU goods at 50% and Apple devices at 25%, have reignited fears of supply chain disruptions. His past business tactics, such as his aggressive yet self-defeating maneuvering in the USFL, echo today’s approach to policy: short-term vanity wins and optics at the expense of long-term system coherence.

Markets may not be pricing it yet, but these moves risk undermining global trade architecture and investor confidence. Meanwhile, China’s rare-earth export cap and renewed nationalism further complicate the landscape for U.S. manufacturers and multinationals.

Monday as the Moment of Truth
Markets appear calm on the surface, but they are floating on unstable fundamentals and fragile positioning. Shorts are heavy, benchmark underweights are deep, and sentiment remains skeptical. With geopolitical tension simmering, bond market fragility rising, and oil threatening to re-anchor inflation expectations, Monday’s open will be a litmus test. Will shorts cover? Will funds re-risk? Or will volatility return with a vengeance?

For portfolio and hedge fund managers, the message is clear: stay nimble, manage tail risk, and prepare for binary market moves. The surface may look still—but the undercurrent is anything but.

Markets

U.S. Market Analysis

  • Equity markets finished modestly lower amid heightened geopolitical tensions and cautious Fed commentary, with the S&P 500 down 0.39% for the week.

  • The Nasdaq and mega-cap tech stocks showed resilience, while small-cap and cyclical sectors underperformed amid volatility in rates and oil.

  • Positioning remains light and defensive; large institutional asset managers continue to trail their benchmarks, and hedge fund net exposure is well below historical averages.

  • Monday’s open is being closely watched as a potential inflection point, given persistent short interest and asymmetric risks tied to geopolitical news flow.

Global Market Analysis

  • Global equities held steady despite Israel-Iran missile exchanges, suggesting investors currently view the conflict as localized and contained.

  • European markets outperformed slightly, supported by improving services PMIs and relief from falling inflation.

  • Asian markets were mixed, with Chinese equities supported by continued stimulus measures, though investor sentiment remains fragile amid weak industrial and retail data.

  • Oil-sensitive markets showed some resilience following crude’s rally on fears of Middle East supply disruption.

Economics

U.S. Economic Overview

  • May inflation data showed core CPI and PPI readings below expectations, reinforcing market hopes for a Fed pivot later this year.

  • Jobless claims rose modestly, and consumer sentiment dipped, reflecting cautious household sentiment as inflation moderates but wage growth slows.

  • Treasury yields declined on the week, driven by soft inflation and dovish rate expectations, though they spiked on Friday following an oil-driven risk-off move.

  • The Fed is expected to hold rates steady at the June meeting, with markets now pricing in nearly two 25-basis-point cuts by year-end.

Global Economic Overview

  • Eurozone industrial production rebounded modestly, but weakness in manufacturing continues to weigh on broader economic growth.

  • Japan’s economy shows signs of softening as consumer spending stalls and inflation expectations remain elevated.

  • China imposed rare-earth export restrictions while reporting a contraction in exports, signaling both economic pressure and strategic posturing.

  • Oil price volatility remains a key macro risk, particularly for net importers and emerging markets, with Brent crude nearing $85/barrel.

Week Ahead

Key U.S. & Global Events

  • The FOMC decision and Powell’s press conference will be the central focus, especially regarding the tone on inflation risk and growth outlook.

  • G7 leaders will meet to discuss geopolitical tensions and trade realignment in response to China’s export restrictions and the evolving Middle East conflict.

  • U.S. retail sales and industrial production reports will offer further clarity on economic momentum entering Q3.

  • Monitoring for any escalation in Middle East hostilities or new U.S. tariff announcements will be critical to assessing near-term volatility.

Upcoming Economic Data

  • Tuesday: U.S. Retail Sales (May), NAHB Housing Market Index

  • Wednesday: FOMC Rate Decision, Summary of Economic Projections, Fed Chair Powell press conference

  • Thursday: Jobless Claims, U.S. Housing Starts & Building Permits

  • Friday: Flash PMIs for U.S., Eurozone, and UK

Notable Earnings Reports

  • Few major earnings releases; attention remains on forward guidance from companies in retail, energy, and industrials with high input cost exposure.

  • Oracle and Adobe will report earnings, providing insight into enterprise spending trends and AI monetization.

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America’s Trade Deficit by Product

Posted on June 13, 2025 by macromon

Great graphic from the Visual Capitalist.  

If the U.S.’s trade deficit were a warehouse of items, what would it look like?  

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Yachts and Tent Cities: How Globalization Helped Fuel Wealth and Backlash

Posted on June 12, 2025 by macromon

The juxtaposition is stark. As Bloomberg reports Wall Street is pouring billions into marinas for ever-larger yachts, the BBC reminds us that U.S. homelessness reached a record high in 2024.

Winners and Losers of Free Trade

This contrast, in part, encapsulates the uneven dividends of globalization and free trade. The opening of global markets allowed firms to slash costs by offshoring production, boost profit margins, fuel stock prices, and funnel massive wealth to shareholders. At the same time, the income effect of free trade (purchasing power expansion) increased demand for domestic goods and services, creating millions of jobs and enriching many American workers.  Moreover, every American consumer benefits from a broader selection of goods and services at lower prices.

Yet a minority, those displaced by trade and globalization, paid a steep price. Deindustrialized regions have slid into long-term decline. Today’s backlash is not a rejection of global integration itself, in our opinion, but a verdict on decades of policy failure. Trade Adjustment Assistance (TAA) to those displaced has been, at best, minimal, while retraining programs are underfunded, poorly targeted, and largely ignored by policymakers. 

White House Interview

Late in President Reagan’s tenure, I interviewed for a junior economist position at the Council of Economic Advisers (CEA). The role was tailored for Ph.D. students who had completed their comprehensive exams and were beginning their dissertations. The CEA was stacked with free marketers, fresh off the Milton Friedman assembly line, preaching the gospel of free markets, mostly from their perch at the University of Chicago.

Trade Adjustment Assistance (TAA)

At the time, Congress was floating a trade adjustment bill to cushion the damage of a surging dollar and a flood of imports. Its centerpiece? A one-time $100,000 check ($301k in 2025 dollars) for laid-off steelworkers. The idea was simple: buy off the casualties of free trade and hope they retrain quietly.

The first question of the day-long interview was, “Gregor, what do you think of a bill writing a $100k check to displaced steel workers?” I answered earnestly, “We should focus on retraining and skills development.” The reply was swift: “That’s what the Democrats think.” The Chicago doctrine held that the market, not government, should determine how and where displaced workers retrain. I didn’t get the job.

Paying the Piper

That bill never passed. But at least at the time, free traders acknowledged the collateral damage of globalization (we use “free trade” and “globalization” interchangeably). Today, after decades of neglecting those left behind, the political cost has finally come due.

Globalization has generated massive wealth, created millions of new jobs, and fueled innovation. But we failed badly at cushioning the losses. Redistributing even a small share of the gains from global markets to those displaced would have been, and still remains, the smarter path forward.

TAA Allocation vs. Apple’s Market Capitalization

Few juxtapositions better capture the myopia and unfairness of our trade policy than the gap between what we’ve spent on displaced workers and what Apple shareholders have gained. Since 2008, the U.S. government has allocated just over $9 billion through Trade Adjustment Assistance (TAA) to support workers who lost or were threatened with losing their jobs due to foreign trade. In that same period, Apple’s shareholders have seen their wealth grow by more than $3 trillion.

Apple Inc. has expertly leveraged free trade and globalization to build an ultra-efficient supply chain, sourcing components from over 40 countries and assembling products in lower-cost regions like China, driving gross margins consistently above 40%. By tapping into global consumer markets, especially in Asia and Europe, Apple now generates over 60% of its revenue internationally, propelling its market capitalization past $3 trillion and enriching its investors.

What’s often overlooked is that this shareholder wealth has, in part, been built on the backs of displaced workers. Surely, a small fraction of those gains could—and should—be reinvested in the people and communities left behind.

Social Infrastructure Investment

Apple shareholders are now feeling the political backlash of globalization, as an Administration, claiming to represent displaced and marginalized workers, pressures the company to onshore operations in ways that defy economic logic. We argue that investing in social infrastructure, whether through Trade Adjustment Assistance or another targeted mechanism to cushion the impact of free trade, would have left Apple, its shareholders, and the nation far better off in the long run.

AI Cometh

Stay tuned because our massive wealth gap and the uneven distribution of income are about to be supercharged by the coming AI revolution.

Universal basic income (UBI)  is the new $100k check for steel workers, folks.  

Let’s hope we don’t fumble again, because AI is coming for jobs, big time. 

Appendix

Trade Adjustment Assistance

The map below visualizes over a decade of federal Trade Adjustment Assistance (TAA) funding, showcasing how different states have absorbed the brunt of economic displacement from globalization and trade liberalization. States in the industrial Midwest and parts of the South received disproportionately high allocations, reflecting the decline of manufacturing sectors in those regions.  

Conversely, lower funding levels in parts of the West and Northeast may indicate either less industrial exposure or underutilization of the program. While TAA has been a central pillar of U.S. trade policy aimed at helping displaced workers retrain and reenter the workforce, this map underscores the persistent regional imbalances in economic vulnerability and the ongoing need for targeted adjustment strategies as new forces like AI and reshoring reshape the labor landscape.

To provide better context, we divided each state’s total Trade Adjustment Assistance (TAA) spending by the size of its labor force, calculating the TAA dollars spent per worker. This normalization reveals sharp disparities—for instance, West Virginia received $168 per worker, while Nevada received just $4.

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Sputnik to Starlink: The Crowded Frontier 

Posted on June 11, 2025 by macromon
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Seriously, They Call It A What?

Posted on June 10, 2025 by macromon

“Classic ‘bait and stitch.’ Yes—stitch.”  So Potemkin!

“The two largest economies in the world have reached a handshake for a framework,” Commerce Secretary Howard Lutnick said. “We’re going to start to implement that framework upon the approval of President Trump, and the Chinese will get their President Xi’s approval, and that’s the process.” – WSJ

 

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China Trade Deal? Where’s the Beef?

Posted on June 10, 2025 by macromon

What the heck?  Looks like a big nothing burger to us.   Seat belts. 


US commerce secretary Howard Lutnick said American and Chinese negotiators had agreed a framework deal to restore a truce in their trade war after marathon negotiations in London. The breakthrough restores the trade war ceasefire reached in Geneva last month that had faltered because of differences over Chinese rare earth exports and US export controls. The US team would return to Washington to present the deal to President Donald Trump, Lutnick said at the end of two days of talks in London. He did not provide any details about the framework. Li Chenggang, one of the Chinese trade officials, said he hoped the negotiations, which he described as professional and candid, would create more trust between the two nations, according to Reuters. Li said the Chinese team would also present the agreement to President Xi Jinping.  – FT

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Shenzhen to Scottsdale: Inside the Surge of Global Wealth Hub

Posted on June 10, 2025 by macromon

Great graphic from the Visual Capitalist ranking cities with the fastest-growing millionaire populations from 2014 to 2024.

Shenzhen Tech Boom

Shenzhen, home to industry leaders such as Huawei, Tencent, and DJI, has rapidly emerged as a global hub for technology and innovation. Its vibrant startup culture and expanding tech sector have produced thousands of new millionaires, driven by stock options, IPOs, and private equity investments. Reinforcing its strategic importance, the Chinese government has designated Shenzhen as a showcase city for forward-looking reforms and cutting-edge development.

Pheonix Scottsdale Rising

Taking second place on the list is Scottsdale, Arizona. Once primarily known as a resort destination, the city has reinvented itself as an emerging tech center. Scottsdale now hosts the headquarters of GoDaddy and offices for major companies such as PayPal, Yelp, and Turo.

Ranked third is Bengaluru, widely recognized as the “Silicon Valley of India.” Its economy is driven by strong performance in IT, biotechnology, aerospace, telecommunications, electronics, and manufacturing.

San Francisco Still Wealth Capital

While the San Francisco Bay Area has seen some major companies relocate in recent years, it still holds the top spot for overall millionaire population, boasting 342,400. The region is also home to 82 billionaires—more than the combined total of billionaires in the next six wealth hubs.

Outside the dominant markets of the U.S., China, and India, Dubai also claims a place in the top 10. Thanks to generous tax policies, a flourishing tech industry, and large-scale real estate projects, the city continues to draw affluent entrepreneurs and global investors.

On a country-by-country basis, the United States leads with eight wealth hubs, followed by China with five, and India with three.

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Japan’s Demographic Crisis Reaches Tipping Point

Posted on June 9, 2025 by macromon
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