Many people who have wide expertise about the energy markets believe that three weeks of having the Strait of Hormuz closed will be the tipping point. This is when the storage capacity of many European and Asian countries starts to reach empty. When that happens, the stock markets start to crash as these countries have to shut down transportation and energy production.
Of course Trump and his lightweight SecDef planned for none of this. Trump told us that he's smarter than the generals, and when the generals told him what Iran is likely to do - block the Strait of Hormuz with drones and mines - Trump ignored them. Now we're in the thick of it and the Confederacy of Dunces in the White House have no clue how fix the mess they've caused.
BTW this: "Although even that may have priced in some chance of future Trump actions in Iran."
Some people were surprised that the price of oil barely budged when Trump announced for a coordinated release of 400 million barrels of oil and refined products from their strategic reserves.
That was because analysts believed he had to do this and it was already baked into the price that was sitting above $90 per barrel. So no drop in oil prices.
Sorry, I'm sure you've explained this, but I'm really surprised that you are using "Department of War," which is not the AP style and not the official name of the department. The AP Style Guide on this is: "We are using the official name in AP copy. If Congress acts to change the name, we would use the new official name."
Trump cannot legally rename a Cabinet department, so this is an example of an authoritarian overreach, an attempt to do something illegal to see if he can get away with it. At best, it is a "nickname" -- the department is still the Department of Defense.
It's similar to the Kennedy Center, which is called "the Kennedy Center" by AP and major news sources (except that it looks like CNN, perhaps in anticipation of its right-wing fate, has started calling it the Trump Kennedy Center) or the Gulf of Mexico (not the Gulf of America).
Well... Given Nate's contextual comments re the Sec of War - who fully merits his self-granted title - I think the non-partisan reader can read Nate's text as something other than approval of the entire affaire and indeed one might read it as something of non-approval...
Arch eggheadery of legalism and quoting style guides you hopefully can contain to Lefty political blogs/substacks where it is the height of cleverness. As like getting bent out of shape over critical views of Califnornian governors.
ETA there is equally quite the argument that the Sec of War and Dep of War self-Id in the hands of the coterie has quite a degree of Truth in Advertising value.
Trump is a useful idiot, easily manipulated by much smarter leaders like Putin, or in this case, Netanyahu. I still think TACO is most likely outcome but there is a lot of uncertainty (otherwise known as risk.)
Yeah I’m curious what others think (and what to do on an individual level in response, other than rotate to e.g. a high yield savings account) but this has been my thought based on yours and other analysis: Trump seems more motivated to take on Iran and the markets seem to be pricing in TACO. Even if he did TACO, Iran and Israel have a say and damage has already been done that can’t just be solved in an instant (there’s lead time to producing and exporting more oil where the market seems to be acting as if maybe we’ll be back to normal in a week or so)
Nate, you are describing a call. A put is the right to sell at a specific price (often slightly below the current price), thereby limiting your losses.
Oil is internationally traded, the straits crisis either causes a spike that hits China, India and Europe as well as the US, or no one is hit. If Iran and China strike a deal to let Chinese tankers through then Nigerian and Angolan oil which was sold to China suddenly is sold to the West. America is badly hit by an oil shock but as a net oil exporter it is less hit than others.
"a 'put' is an option to buy a stock at a specified price that’s typically lower than its current value"
No, a put is an option to sell a stock, and it can be either in-the-money (the exercise price is higher than the current price, so you would exercise if it were about to expire) or out-of-the-money (the exercise price is less than the current price, so you would only exercise if the price fell). The option to buy is a "call" option, which also can be in or out of the money, although in the reverse circumstances.
The original "Greenspan put" was the idea you could buy stocks with limited downside risk, because if the market fell, Greenspan would cut rates to push it back up.
Alan Greenspan--who played a skilled, but not professional, game of poker--understood the game theory nature of the idea, thus his famous reply at a Senate hearing, ""If I seem unduly clear to you, you must have misunderstood what I said." Treasury Secretary Henry Paulson--a bad poker player--displayed the classic confusion of people who don't understand bluffs, "If you have a bazooka in your pocket and people know it, you probably won't have to use it."
I think this account suffers from the ludic fallacy, the treatment of probability like a casino game. Of course, this is how the mathematical field of probability developed, but it considers a specialized type of randomness that only exists when humans create it for games. Over the succeeding centuries different types of randomness emerged from scientific study of nature: random mutation and natural selection in biology, statistical thermodynamics, quantum uncertainty and game theory--each of which use an entirely different concept of probability.
In this case, I think quantum uncertainty is more relevant than casino games. Without liquid financial markets there are many prices for the same thing existing in different places and circumstances. A liquid financial market "collapses" these into a single price enforced by arbitrage. But until that happens, a wide variety of potential prices are in force. This means that a financial path that would be impossible under $65 oil or $200 oil or any other price can occur.
Now there are liquid markets for a few reference types of specific crude oil and refined products at specific times and places. These limit superposition randomness. But those are a small fraction of total oil price uncertainty. Many profitable trading strategies involve betting on paths that require superposition.
The idea of a Trump or Greenspan put is not a game theory concept, but a quantum one. It allows traders to ignore price paths that pass through a region which would cause a wave function collapse. It's a ludic fallacy to assume there is one correct price that is the probability-weighted average of possible prices from some distribution. Rather traders are buying and selling at a price that supports strategies that make money in the superposition of states--and both buyers and sellers can have winning strategies. TACO is a limitation on the range of superposition, not a change to the probability distribution of future prices.
This made me laugh out loud: "It might actually help Trump in a weird way that his behavior is effectively random in some ways based on the last person he talked to or the last TV segment he watched."
I have less conviction on my stances wrt military intervention ever since we started aiding Ukraine immediately after withdrawing from Afghanistan. Combined with the fact that we invaded Iraq for practically no good reason whatsoever, then basically created the conditions for ISIS to spawn, while simultaneously nation building in Afghanistan for 20 years for it to literally collapse in 1 day. It just seems like the calculus on these decisions is too hard to get right. And any priors I have will basically mean nothing due to unforeseen second and third degree consequences once things get "kinetic". I used to concern myself with these things, but I have since turned into a casual observer. My basic instinct is that bombing Iran was not in our best interests, and now it seems we have kicked the hornets nest yet again.
That's not to say intervention is never a good idea, I just really don't know when or when not and what conditions make it apparent.
If the goal for the Dems is to nominate the person most likely to win in 2028, I suppose Nate could find a poll that would be compelling evidence for Liz Cheney.
There are a large number of reasons Newsom might be a bad selection, but "underperforming" in California is not meaningful when your basis is comparing off year elections to presidential cycles. Bad methodology leads to garbage conclusions.
Sure there are downside risks. But markets also have to consider upside risks. What if Iran surrenders and oil crashes to $50? Like the poker player raises your bluff with an even worse hand? Markets have to balance tail risks on both sides which makes them often look like they are pricing the median outcome and ignoring the tails. But they are not ignoring the tails.
Wouldn't expect $200 oil, either. These are tail risks. Don't let the media scare you with all sorts of bad-news scenarios. "Everything will work out fine" doesn't get many clicks. But it's often the outcome.
Re: Democrats always falling for the same trick, I agree with Nate. With the rare exceptions of FDR (yes, you have go back that far) and JFK (still over 65 years ago) coastal-elite has not been a winning formula. After Kerry, Clinton and Harris, you'd think they'd notice.
Yes, it might be a stretch for me to consider Obama a folksie mid-westerner, but his is not a model that can be easily replicated. Perhaps try someone from a southern state: Truman, Johnson, Carter, Clinton and Biden.
You got the definition of put option wrong. It’s an option to sell not buy!
Thank you! That's what I came here to post.
Many people who have wide expertise about the energy markets believe that three weeks of having the Strait of Hormuz closed will be the tipping point. This is when the storage capacity of many European and Asian countries starts to reach empty. When that happens, the stock markets start to crash as these countries have to shut down transportation and energy production.
Of course Trump and his lightweight SecDef planned for none of this. Trump told us that he's smarter than the generals, and when the generals told him what Iran is likely to do - block the Strait of Hormuz with drones and mines - Trump ignored them. Now we're in the thick of it and the Confederacy of Dunces in the White House have no clue how fix the mess they've caused.
BTW this: "Although even that may have priced in some chance of future Trump actions in Iran."
Some people were surprised that the price of oil barely budged when Trump announced for a coordinated release of 400 million barrels of oil and refined products from their strategic reserves.
That was because analysts believed he had to do this and it was already baked into the price that was sitting above $90 per barrel. So no drop in oil prices.
The world uses about 100 million barrels per day, and about 20% goes through the Strait of Hormuz, so 20 million per day.
The 400 million barrel strategeric reserve vanishes in less than a month, so it is pretty easy to fold into the models the traders use.
Sorry, I'm sure you've explained this, but I'm really surprised that you are using "Department of War," which is not the AP style and not the official name of the department. The AP Style Guide on this is: "We are using the official name in AP copy. If Congress acts to change the name, we would use the new official name."
Trump cannot legally rename a Cabinet department, so this is an example of an authoritarian overreach, an attempt to do something illegal to see if he can get away with it. At best, it is a "nickname" -- the department is still the Department of Defense.
It's similar to the Kennedy Center, which is called "the Kennedy Center" by AP and major news sources (except that it looks like CNN, perhaps in anticipation of its right-wing fate, has started calling it the Trump Kennedy Center) or the Gulf of Mexico (not the Gulf of America).
AP Style Guide: So the fuck what? Nate writes his substack, he's not an AP stringer.
Nate isn't a MAGA stringer either.
Sure the Trump Department of Defense identifies as a Department of War.
I wonder what the birth certificate says?
Well... Given Nate's contextual comments re the Sec of War - who fully merits his self-granted title - I think the non-partisan reader can read Nate's text as something other than approval of the entire affaire and indeed one might read it as something of non-approval...
Arch eggheadery of legalism and quoting style guides you hopefully can contain to Lefty political blogs/substacks where it is the height of cleverness. As like getting bent out of shape over critical views of Califnornian governors.
ETA there is equally quite the argument that the Sec of War and Dep of War self-Id in the hands of the coterie has quite a degree of Truth in Advertising value.
You seem more bent out of shape than makes sense.
As a finer point, Congressional allocations are for the Dept of Defense.
The Dept of War has no funding, which would make things interesting if actual law mattered.
Trump is a useful idiot, easily manipulated by much smarter leaders like Putin, or in this case, Netanyahu. I still think TACO is most likely outcome but there is a lot of uncertainty (otherwise known as risk.)
Yeah I’m curious what others think (and what to do on an individual level in response, other than rotate to e.g. a high yield savings account) but this has been my thought based on yours and other analysis: Trump seems more motivated to take on Iran and the markets seem to be pricing in TACO. Even if he did TACO, Iran and Israel have a say and damage has already been done that can’t just be solved in an instant (there’s lead time to producing and exporting more oil where the market seems to be acting as if maybe we’ll be back to normal in a week or so)
Nate, you are describing a call. A put is the right to sell at a specific price (often slightly below the current price), thereby limiting your losses.
Oil is internationally traded, the straits crisis either causes a spike that hits China, India and Europe as well as the US, or no one is hit. If Iran and China strike a deal to let Chinese tankers through then Nigerian and Angolan oil which was sold to China suddenly is sold to the West. America is badly hit by an oil shock but as a net oil exporter it is less hit than others.
"a 'put' is an option to buy a stock at a specified price that’s typically lower than its current value"
No, a put is an option to sell a stock, and it can be either in-the-money (the exercise price is higher than the current price, so you would exercise if it were about to expire) or out-of-the-money (the exercise price is less than the current price, so you would only exercise if the price fell). The option to buy is a "call" option, which also can be in or out of the money, although in the reverse circumstances.
The original "Greenspan put" was the idea you could buy stocks with limited downside risk, because if the market fell, Greenspan would cut rates to push it back up.
Alan Greenspan--who played a skilled, but not professional, game of poker--understood the game theory nature of the idea, thus his famous reply at a Senate hearing, ""If I seem unduly clear to you, you must have misunderstood what I said." Treasury Secretary Henry Paulson--a bad poker player--displayed the classic confusion of people who don't understand bluffs, "If you have a bazooka in your pocket and people know it, you probably won't have to use it."
I think this account suffers from the ludic fallacy, the treatment of probability like a casino game. Of course, this is how the mathematical field of probability developed, but it considers a specialized type of randomness that only exists when humans create it for games. Over the succeeding centuries different types of randomness emerged from scientific study of nature: random mutation and natural selection in biology, statistical thermodynamics, quantum uncertainty and game theory--each of which use an entirely different concept of probability.
In this case, I think quantum uncertainty is more relevant than casino games. Without liquid financial markets there are many prices for the same thing existing in different places and circumstances. A liquid financial market "collapses" these into a single price enforced by arbitrage. But until that happens, a wide variety of potential prices are in force. This means that a financial path that would be impossible under $65 oil or $200 oil or any other price can occur.
Now there are liquid markets for a few reference types of specific crude oil and refined products at specific times and places. These limit superposition randomness. But those are a small fraction of total oil price uncertainty. Many profitable trading strategies involve betting on paths that require superposition.
The idea of a Trump or Greenspan put is not a game theory concept, but a quantum one. It allows traders to ignore price paths that pass through a region which would cause a wave function collapse. It's a ludic fallacy to assume there is one correct price that is the probability-weighted average of possible prices from some distribution. Rather traders are buying and selling at a price that supports strategies that make money in the superposition of states--and both buyers and sellers can have winning strategies. TACO is a limitation on the range of superposition, not a change to the probability distribution of future prices.
This made me laugh out loud: "It might actually help Trump in a weird way that his behavior is effectively random in some ways based on the last person he talked to or the last TV segment he watched."
I have less conviction on my stances wrt military intervention ever since we started aiding Ukraine immediately after withdrawing from Afghanistan. Combined with the fact that we invaded Iraq for practically no good reason whatsoever, then basically created the conditions for ISIS to spawn, while simultaneously nation building in Afghanistan for 20 years for it to literally collapse in 1 day. It just seems like the calculus on these decisions is too hard to get right. And any priors I have will basically mean nothing due to unforeseen second and third degree consequences once things get "kinetic". I used to concern myself with these things, but I have since turned into a casual observer. My basic instinct is that bombing Iran was not in our best interests, and now it seems we have kicked the hornets nest yet again.
That's not to say intervention is never a good idea, I just really don't know when or when not and what conditions make it apparent.
They were betting a quick collapse and regime change in Iran, much like Germans did in 1941. The question now is: who is going to blink first?
err.... What???: "I couldn’t disagree more with media critics who say that the media has focused too much on Iran and not enough on Epstein!"
More on Epstein and less on Hormuz????????
Enough with the content free Newsom bashing.
If the goal for the Dems is to nominate the person most likely to win in 2028, I suppose Nate could find a poll that would be compelling evidence for Liz Cheney.
There are a large number of reasons Newsom might be a bad selection, but "underperforming" in California is not meaningful when your basis is comparing off year elections to presidential cycles. Bad methodology leads to garbage conclusions.
Sure there are downside risks. But markets also have to consider upside risks. What if Iran surrenders and oil crashes to $50? Like the poker player raises your bluff with an even worse hand? Markets have to balance tail risks on both sides which makes them often look like they are pricing the median outcome and ignoring the tails. But they are not ignoring the tails.
Did you ever hear the old expression - "gas prices go up like a rocket and come down like a feather"?
Don't count on $50 oil anytime soon regardless of what Iran does. Also don't count on Iran surrendering. They still have plenty of cards to play.
Wouldn't expect $200 oil, either. These are tail risks. Don't let the media scare you with all sorts of bad-news scenarios. "Everything will work out fine" doesn't get many clicks. But it's often the outcome.
I suppose you missed the cost of energy spikes that happened in California during the Enron mess.
It doesn't take much of a supply shortfall to result in a wild bidding war.
https://www.caiso.com/Documents/December2001MarketAnalysisReport-Memorandum.pdf
1st
Re: Democrats always falling for the same trick, I agree with Nate. With the rare exceptions of FDR (yes, you have go back that far) and JFK (still over 65 years ago) coastal-elite has not been a winning formula. After Kerry, Clinton and Harris, you'd think they'd notice.
Yes, it might be a stretch for me to consider Obama a folksie mid-westerner, but his is not a model that can be easily replicated. Perhaps try someone from a southern state: Truman, Johnson, Carter, Clinton and Biden.
Come on now - up your game a little.
If you are going to go back to FDR, you should also include Dukakis in the "Coastal Elite" camp.
Is Mondale really "Coastal"? Georgia has a lot more coastline than Minnesota.
Similarly, South Dakota, and Minnesota (again in 68) also lost. Those states would probably be surprised to learn they have coastal access.
And I suppose if you are giving Obama a "non-coastal", then that applies to Stevenson also.
And meanwhile during that same period there have been a number of Coastal winners for the Republicans.
Nope, your hypothesis is not supported by actual data. At best you have a weak correlation if you cherry pick your True Scotsmen.
Nate's "underperforming" claim has a better basis in reality - at least he showed his math.