저자: JimBianco · 외국인
요약 보기
파월의 연준 잔류는 건설비 초과 조사 문제로 기관을 인질로 잡는 정치적 결정이라고 비판. 8-4 표결은 독립 투표 확대의 신호이며, 유가·인플레 상승으로 금리 인하 기대가 후퇴하고 장기금리는 상승 추세. 드론전 시대에 방산주는 하락, 호르무즈 봉쇄가 길어질수록 원유 상승 예상. 롱 포지션으로 원유(DBC 등)와 금리 상승에 노출, 주식시장 방향은 유보.
다듬은 글
We are here another edition of Monetary Matters live on Monitoring the Situation. I'm Jack Farley. And I'm Max Wethey. We've got a big day, Jack. It's almost a comically large amount of news we have to get into. We're going to be speaking about the Fed in just a moment with Jim Bianco of Bianco Research.
We've had a little bit more time to to process what happened with J. Powell. You've been getting a lot of flak today uh because you believe that J. Powell staying is a mistake. Why do you think that's a mistake? Because of the reason he's staying. The reason he is staying on with the Fed is because he believes that he doesn't trust the administration to properly investigate the overruns in the building contract uh in the buildings uh or renovations of the Federal Reserve buildings.
Okay, fine. So, you're going to stay on and you're going to hold the institution hostage in order to get an effective outcome that you want. And I thought his outcome was pretty clear. The Fed's an independent institution. No one is allowed to ask any questions. If they want to build if they want to build a marble edifice to themselves that's going to run billions over cost, don't ask any questions.
You're not allowed to ask any questions about how they do monetary policy or anything else. Marriner Eccles is the only other Fed chairman who stayed on as a governor. In the 1940s, he stayed on because the end of World War II, we had Bretton Woods, we had with Bretton Woods, the World Bank, the IMF, and he recognized that there was a period of epic change coming, and he wanted to shepherd the world into this new era.
Seems like what we got 80 years later is another time of epic change, and J. Powell wants to stand in the doorway and prevent that change. You're not allowed to ask questions. You're not allowed He said he wants the institution to remain the traditional way it's maintained. I think that the institution is changing.
I've those those changes. I think those changes are good and he just announced he's not going to he's not going to stand in the way of those changes. He wants to stand in the way of those changes. And this is going to cause a lot of grief at the Federal Reserve. I think it at the end of the day. They're not going to like what's going to happen next and I'm not just talking about what Trump is going to do.
Let me just go off one other thing. One of the changes What about the independence of the Fed? I've been arguing now for months. The independence of the Fed and I'll say it bluntly is largely solved. It is solved because we now have 12 independent voters. Today's vote was an 8-4 vote. The last time we had four dissents was October of 1992, 34 years ago.
This is the world we live in now. Everybody is going to vote independently. I've been arguing actually for years that the group think at the Fed and everybody waits for the chairman to tell them what to do and we all parse every word that the chairman says has produced more problems than it is than than issues that it is solved.
We are getting away from that right now. Now, if Chairman Powell says he doesn't like that and he wants to see the Fed be more in independent. He said he's going to be in the background and he doesn't want to be disruptive. So, here's my question for you. We're already at 8-4. That's not that far from 6-6.
What happens if we get to 6-6 or 7-5 and Chairman Powell gets to decide by himself on policy? And he's already said, "I'm not there because I think I can bring something to monetary policy." That's not what he said. He said, "I'm there to prevent change and to protect the institution from Donald Trump." So, he is making an overtly political statement by staying in the manner he is staying.
In the early part of this, and this is the last thing I'll say on this, I could understand what he was doing, but then Tom Tillis, senator from North Carolina, took up the cause and put a block on uh Kevin Warsh's nomination. There was an agreement last week. The Inspector General of the Federal Reserve will investigate the building.
If the Inspector General of the Federal Reserve finds any wrongdoing, then the Inspector General could put uh could recommend criminal charges to the Justice Department. It's not good enough for for J Powell. He wants no investigation, it seems like. Oh, but the Justice Department said they could bring charges later or have an investigation later on.
They can do that to anybody for any reason at any time. That is not a statement, that is not a threat that there will be a future investigation. Um and he is going to hold the institution hostage so that they don't investigate. That is a giant mistake for the institution. Don't investigate the construction project?
Yes, the the the construction projects. Because, you know, he he is That's what he's basically That's what this is all about. It's about the the overrun, the over cost overrun, which could run north of a couple of billion dollars, depending on how you measure it, over several years. And he doesn't want any You're not allowed to ask about that marble building that they're building.
They're just building it and it's none of your business how much it cost. That's effectively what I heard him say. You might not like Trump. You might not like Trump, and I understand it, and I got Man, do I have issues with Trump, but this doesn't make it right. This makes it worse, what J Powell is doing.
Jim, are you saying that the administration's investigation into the Federal Reserve was 100% legitimately concerned with the issues at matter. In other words, spending billions of dollars and they were worried about the taxpayer and that it wasn't politically motivated because Powell and the Federal Reserve wasn't cutting rates that the president wanted to.
Is that what you're saying? No, I'm saying it was. I'm saying it was and that's why I said prior to last week's agreement I understood Powell's position. But last week's agreement was that investigation is closed. That is no more. Now the Inspector General of the Federal Reserve is going to investigate the building cost overruns.
And if the Inspector General of the Federal Reserve says that there's shady dealings, they might recommend to the Justice Department a criminal investigation. And Powell said, "Still not good enough. You're looking at the building." That's what I heard him say. And he seems to be saying no one's allowed to ask any questions about this building.
I feel if I'm wrong, I'd just like to hear what what narrow path he's trying to argue with this. Jim, I listened to Powell say that and I was listening to you just now, of course, but can you just repeat that again? So, the administration, the investigation is officially over, but they're kind of retaining some right to look into and ask questions and that's what Powell doesn't like.
Can you just explain that for audience and me? Yeah, yeah, they closed the investigation, the criminal investigation into the overruns of the buildings and they said that the Federal Reserve has its own Inspector General, they can investigate it, okay? That was good enough for Tom Tillis to lift the hold that he had on Kevin Warsh's nomination and he voted to advance Kevin Warsh earlier today.
But that's not good enough for Jay Powell is what he seems to be saying. Now, the Justice Department said, "Well, we could open another investigation later on if we decide to." Yes, they could and they could do that to anybody for any reason at any time. That is a constant for every Justice Department always.
That is a statement that is a It's kind of a statement of the obvious. They can always do that. And so, if your answer is, "We might get investigated somewhere in the future, so I'm going to hold the Federal Reserve hostage so no one ever looks into us." That is a problem. I think that is a problem.
If he doesn't like it, he I'm sorry. Donald Trump won the election. Maybe you like it, maybe you don't. He gets to, you know, put the Justice Department in that he wants, just like Joe Biden got to put the Justice Department in that he wanted, uh, in part investigated Donald Trump. And just like in 2029 when we have a new president, they can put in the Justice Department that they want for whatever reason.
That's the way the system works. You don't get to hold the Federal Reserve hostage because you're you don't like what they the Justice Department may or may not do. That's all I'm trying to say. And that's why I think it's an intensely political decision on Powell. It is not an economic decision on Powell.
And in an era where we're already at an 8-4 dissent, Powell could be the swing vote. In as early as the June meeting, he could be the swing vote, whether he likes it or not. And he's already said he's there for political reasons. My understanding with the 8-4 vote was it was on the language about easing bias.
So, it wasn't that we had a dissent on the the decision to raise or lower interest rates, it was on this language being in the statement. And I think that is very different than a than a dissent on the actual policy decision. Right, right. We there's one dissent as we kind of always have had for series of months of Myron Governor Myron who I've interviewed on monetary matters wanted to cut interest rates.
So, that was a dissent on rates, but you're absolutely right, Max, that the other three were dissents not on the fact that hold rates steady, they just wanted to remove the easing bias language. Jim, explain what that easing bias language is and why it's significant. It's significant because what it is is that it's part of the Fed's forward guidance.
Forward guidance is you know, fancy way of saying we're going to tell you what we're thinking about doing in the future. And what those three said is, "Look, we shouldn't be cutting rates." And now there are three and there was, you know, eight that had no problem with that policy, including Powell.
Um I would Yeah, including Powell cuz he wasn't one of the dissenters. And so really the Fed is and if you read the minutes of the Fed, it is very clear that if you were to sit around the room and ask people where they think policy is and then you look at where they vote, they're not totally in agreement with each other because they're in this process of becoming more independent.
The the banks are becoming much more independent. That is, the Federal Reserve banks are because all the dissenters were from the from the regional banks. The governors are starting to become more independent. We've seen Governor Bowman and Governor Waller dissent in the past. We've seen Governor Mester dissent in the past.
So really this is about where they want to signal policy is going to go in the future. Yes, the market has been pricing a zero probability effectively that the Fed was going to change rates at this meeting for months. Really those dissents were about what should you expect for the rest of the year? And that's, you know, we had three of them say, "We should not be leading people on to thinking that we're going to cut rates for the rest of the year." Now eight of them did, but we didn't have any of that at the last meeting.
And if I was to transition a little bit here, if we wind up seeing more inflation and Jay Powell said at the meeting that their estimate and by the way, their estimate's going to be spot on, that year-over-year PCE inflation is already at 3 and 1/2% way above target. That and it could potentially go higher.
Look at we just went over $120 on June Brent crude oil today. So, it could go way higher. You could go from no dissenters in an easing policy to three at this meeting to six or seven at the next meeting. You could go that fast on it if if the price of crude oil continues to go up. And if the inflation pressure on this economy continues to grow.
And I use six or seven as my example because it might be five or six because that sixth vote might be J. Powell. And so, he's going to stay in the background, but now every vote matters. It's no longer what the chairman wants, the chairman gets. And so, that's why it it's concerning. He said, "I'm going to be political.
I'm going to stay here." Is basically what he said. He's He did say I'm going to stay here. He He said he'll be, you know, quiet in the background, not trying to make a scene, not trying to rock the boat. Um so, All right, what does that mean? I understand what that means in one respect. Yeah, what does that mean?
I understand what that means in one respect. He's not going to give a speech. That's the last time we're going to see him in public for several months. Um give a public presentation for several months. But, if the world was still 12-0 11-1 votes, and he could just stay there and agree with the consensus, then that's one thing, but that's not the world we're moving into.
We're moving into a world of independent voting. And he's an independent voter now. And he has told us that his decision to stay is not because of economics or monetary policy, it's about changes coming to the institution, and he doesn't want it. And he doesn't want he wants to be a block on the administration and trying to force that change on the institution.
Now, you know, I have lots of problems with with what Donald Trump has done with this institution. But I also thought that the decision last week cleared this up for him to potentially move on from his policy, but apparently um Paul wants to stay. And the last thing I'll say about this, all of this is going to come to a head in the next 6 weeks.
Because in the next 6 weeks the Supreme Court is going to vote on whether or not President Trump has the ability to fire Fed Governor Lisa Cook for cause. Quick background for everybody on this. Um there's two types uh there's two types of jobs you can have in Washington, at will and for cause. Um you know, at will is a fancy way of saying you serve at the pleasure of the president.
He can fire you at any time, you know, uh cabinet members are at will. He can fire you at any time for any reason or no reason. For cause means that you get this job, but if you do something that causes me rises to a certain level that causes me to fire you, then I can fire you. Now, President Trump has been arguing that Lisa Cook filled out some mortgage applications incorrectly and it resulted in her potentially getting a lower mortgage rate than she should have.
She had said a second home was her primary home and that's how she wound up getting a lower mortgage rate and he said that that's a for cause reason to fire her. The Supreme Court heard oral arguments in January about it. The Supreme Court should rule before the end of its term by the middle of June.
So, that's only in the next 6 or 7 weeks. If the Supreme Court rules he can't fire her for for cause, well, that's one thing. But if the Supreme Court gives President Trump an opening to fire Lisa Cook, he'll probably fire J. Powell that same day. And uh and then we'll see an epic change in the in in the in the court anyway.
I mean, in the uh in the Federal Reserve anyway. So, there's more people coming to the Fed. It seems like one way or the other. Yeah, I mean, you're characterizing this um this divide between the the voting members of the FOMC as being a a sign of of independence. Is it reasonable to say that it's more a sign of the uncertainty that we have about inflation, right?
There's so much uncertainty. I as Powell said, they're still not even sure about tariff inflation, and that they're that's where they're at. We have they haven't even gotten as an organization to the war inflation yet. Um and and as much as as the the dissents, I mean, to characterize this 8-4, we had three people actually showing a a hawkish bias wanting to remove the easing easing comments.
And then you had Miron on the other side. So, it's really more like 1-3 uh 1 1-3-8 than it is 8-4. Yeah, it it it is. It By the way, um what's happening with all these votes is not unusual for central banks. Last year, the Bank of England voted to cut interest rates 25 basis points. And the they have nine voters.
The vote was 4-4-1. The one was for 50. So, they wound up cutting 25 because that's half of half of 50. But, that's where they are, 4-4-1. We've seen 5-4 votes out of the Bank of Japan. The ECB does not disclose their votes, but it's understood that if they were disclosing their votes, there'd be wide disagreement within the ECB about what they should be doing as well.
By the way, Stephen Miron's out because Powell's not leaving right now. He'll he will step down on May 15th so that um um Kevin Warsh can have his spot in order to be the Fed chairman. So, he's done at the Fed for now. Maybe Trump if Trump gets an open seat, he might consider him for that, but that's if there's an open seat and if he wants to take him or somebody else then at that point.
So, I do think that what you're starting to see is you're seeing these these central banks becoming more independent and it's that's exactly for your reason is that inflation is uncertain. We are 6 years past COVID. Fed's nowhere near their 2% target. In fact, we're going to be at 3 and 1/2 right now.
Powell dismissed it as a series of never-ending one-off shocks starting with the supply chain shock after COVID all the way through to the tariff shock and now this shock. In other words, we're perfect. I'm I'm being critical of the Fed here. We're perfect. It's just circumstances constantly get in the way.
Well, that's kind of your job is to deal with circumstances. And I think that maybe the best way to deal with that is to allow more independent voting. Now, the Fed is doing that and I think that we should probably see more of it, but I would remind you no one dissented for getting rid of the easing policy at the last meeting.
Now, we got three. And you know, if inflation stays sticky and oil prices go up, I could easily see that growing in terms of the dissents for the easing policy. By the way, the market is not you know, waiting around for it. It is already priced out all the hikes for 2026. So, it's already there assuming that they're even though they're holding an ease priced out all the cuts.
I'm sorry, all the cuts. I'm sorry, all the cuts. It's priced out all the cuts for 2026. It's already assuming they're there even though they officially haven't moved in that direction. So, coming soon is that the Fed will probably validate where the market is. Jim, thanks. I got tons more questions on the the Fed.
Just want to step back, give a shout out to our our viewers here on MTS. Looks like we've got 8,400 of of people. Rogoff says he loves the show. Someone else says good segment. And B says mortgage fraud, the worst kind of fraud. I would like to clarify for B that I believe the mortgage activity from Lisa Cook specified was is not the type of thing you know where they like get a loan on a foreclosed property or or something you know such as in The Sopranos if if people have watched that show.
I you know obviously very popular show. Jim, just want to also step back and just review some of the earnings. And you know if we can share the screens here with you know the the aggregators on on X. I'm just looking at these earnings per share that they reported. You know Meta and Amazon, Google in terms of their their reported versus expectations.
And that it was such a beat that I think probably the estimates that that Wall Street had probably didn't account fully just how big these gap profits that they would book from Anthropic and and SpaceX and all these private companies. Like you know Meta's earnings per share of of $10.40 versus $6.82.
Again, I think there was some tax thing that the analysts obviously the analysts are very smart, but they're not up to date on every little thing in the in the spreadsheets of the accountants going there. So, I you know it's possible that Meta did a true 40% beat, but I I kind of doubt it. And you know again, we're recording we're recording this
if I could if I could jump in real quick, you know I tell you about where the S&P is trading after hours. And when we started 20 minutes ago, I said it was down 40 you know would have been the equivalent of the S&P being down 40 points. It's now up one. And that's that's not unusual when you get these earnings, because remember after hours 400 or 450 of the S&P stocks are not trading.
It's only a handful of stocks that are trading, and it's those that have a reason to trade, like those that have released their earnings. So now the market has reassessed it the other way, and it's come all the way back to unchanged right now. And so that that's not unusual for the way the market reacts to earnings.
Right. And someone who's paying a lot of attention to the valuations of private companies is Vlad Tennev, CEO of Robinhood, at 5:15 p.m. Eastern, so 2:50 p.m. Central Pacific Time, Max and I will be speaking to Vlad, so people should stay tuned for that. Jim, going back to the Fed, what is the Fed's philosophy, the overall central bank philosophy of how to react to an oil shock such as the one we're having right now, Brent crude oil trading over $120?
What today from Jay Powell's press release and conference did you glean on how he and the rest of the institution is thinking just about how what their interest rate policy should be in the face of this massive supply disruption, probably the biggest energy shock in terms of barrels of oil per day that we've ever seen in the world?
Right. So two things, he he used a term that inflation is misbehaving. And then he was asked about, well, it might be misbehaving, and this is true, the American public doesn't think we the American public doesn't think that the economy is doing well at all. It doesn't understand why the S&P's near its all-time highs.
Uh and he was asked about, what do you tell people that are worried about cost of living and have seen major cost of living rises in order, you know, since COVID, you know, the CPI's up 30% since COVID. Uh and I took his comments, and this is not new, he's been saying this, somewhat dismissive. Well, you know, it's I understand it, but don't worry, we're committed to getting the inflation rate down to 2% even though it's going to 3.5% right now, and not to worry about it.
And then later on, he took great solace in saying the market, meaning inflation break even rates from the TIPS market, is agreeing that there isn't a long-term inflation problem. What he means is the I'll get a little wonky here, the five-year five-year TIPS break even rate. What that is is the Fed likes that measure.
They look at the 10-year TIPS break even rate, they look at the five-year TIPS break even rate, and they figure out what the five-year average is going to be in five years, and that number is hardly moved. And so the Fed is saying, "So, that's validation that they've got the right policy." And I'm like, that makes me very uneasy when he says that inflation's misbehaving, gaslights the public about what they're seeing at the grocery store, and says that a bunch of Wall Street bond traders are telling us that in 2031, there won't be any inflation till 2036, and so therefore, we've got the right policy.
I think that there's there's a fundamental problem with the way that he explained that. And now, and to be fair to Paul, he's that that's not new today, you know, and a lot of other people at the Fed have said that, and I've been critical of this for a long time in the way that they've been looking at inflation.
Inflation is an expectations thing. The Fed talks about it's an expectations thing. And my my bewilderment is the polling says, political polling says the majority of Americans think we've got an affordability problem. And the Fed says, "No, we don't." And because the TIPS market, cuz 10 bond traders said we don't have an an problem.
That seems to I mean, I'm kind of exaggerating on the 10 bond traders, but that seems to be the argument that they're going down right now, and it's a very very dangerous road that the Fed is going down on this part. And in fairness to Powell, I think Warsh is going to say something similar to that when he becomes Fed chairman um as well.
And I think that's a big mistake. If the American public thinks that in that affordability's a problem, it's a problem. Full stop. And if you want to stand on your head and say what you're seeing you don't see and it doesn't exist, that's the wrong approach. If they think affordability's a problem, then bring it down.
That's what you need to do. You need to stay to bring policy to bring it down. Instead, the Fed wants to say it's not a problem. We want an easy bias. We want to be cutting rates later this year is what they've is what they're saying right now. Right. So, the interest rates from the Fed are at 3.6% that they didn't change them today at all.
Sounds like if the incoming Fed chair was a Jim Bianco, interest rates would be heading up to maybe a little four, maybe a little 4.5% instead of Jim Bianco incoming Fed chair, it is incoming Fed chair Kevin Warsh. He is even more dovish, so even more fan of a lower rates in this environment than than J.
Powell and the and the current Fed. And in his uh confirmation hearing, he said that he thinks this current environment because of AI is going to be deflationary. So, he's indicating that he is prefers a little bit of a lower rates. Obviously, he didn't he didn't give any explicit guidance, but you can kind of read the tea leaves.
Meanwhile, he's very hawkish on the balance sheet. Uh at the same time, he promised to dissent that he's not going to do what Trump wants and cut rates just because President Trump who appointed him or or recommended him uh nominated him is is is going to that's what he wants. So, Jim, how what do you think the Fed is going to look like under Kevin Warsh leaving aside that the palace intrigue of how many dissents they're going to be, just just what is going to be the outlook of the Fed with regards to in you know, interest rates?
Is it going to be more dovish than the Powell Fed that we have now? So, to answer the first part of your question, yes, I would be very I would be a much more hawkish and I would be probably leaning towards the idea of hiking rates if I was going into the Fed. And I will say I wouldn't be alone because if you read the speeches of Dallas Fed President Lorie Logan or Cleveland Fed President Beth Hammack, both of which were dissenters and voters, they're largely in agreement with my statement that maybe we should be looking at raising rates before the end of the year.
So, there's there are people at the Fed. Neil Kashkari might be there, too, and a couple of other Fed voter a couple of other Fed members who are currently not voters this year might also be in that camp as well. So, that is not a unique position. It's not a majority position, but to think about maybe raising rates before the end of the year is not a unique position.
And the last thing I'll mention on that is there's large expectations that the Bank of Japan, who's been raising rates, will continue to raise rates. And the Bank of ECB will probably raise rates before the end of the year. So, there's not like if the Fed were to raise rates, they would be an outlier.
They're actually an outlier by not raising rates because most of them are either raising rates or they're considering raising rates um right now. So, I think that that's where they are. Now, as far as Warsh goes, I think Warsh is going to come in and he's going to make the arguments that AI and by the way, if you would ask me just as a quick tangent, why is the stock market ignoring 441 on the 10-year note?
Why is the stock market ignoring $120 on crude oil? I would argue to you that the stock market believes the single biggest story today is AI. And it believes in the power that AI is going to be transformative for the US economy. And that is driving it more than whatever's happening in the Strait of Hormuz.
Whether that's right or wrong remains to be seen. But right now, that's really the story that we've got going with um um with the stock market. But he's going to make the case that AI is deflationary. And he will try and make that case, but I will come back to the dissents because I've argued that Fed watching today is not parse the Kevin Warsh's words cuz he's only one of 12 voters.
Kevin Warsh will stake out a position. The question is, are there six other members of the vote are there six other voters that agree with him on that position? That is what remains to be seen is to whether or not he can get to seven votes cuz that's the way the Fed is working right now. Uh you know, I if you want me to give you an illustration, there was some talk about should they get rid of the dot plot?
Should they change their forward guidance? I know you know a little bit about forward guidance, Jack. You had a podcast called that in the past. And I would say yes. And I would say here's what the Fed should do in the future. They should get rid of the dot plot. They should get rid of this uh summary of economic projections.
They should then um do something akin to what the ECB does. They vote. They have a vote and then all 12 voters go to the press conference. And the chairman runs the press conference, but cuz I actually think that today well, today was a little unique because it was more about Paul staying. But normally, if if it wasn't about Paul staying, I would say it's the wrong person.
I want to talk to Logan. I want to talk to Hammock. I want to talk to Kashkari. I want them to explain their dissents because that mattered more today on policy than what the chairman said about policy. That's where we're going. And the forward guidance in the future is going to be the dissents. 8-4 vote, or if you want to call it 8-3 with Mester and out, is it that didn't have any any dissents the last meeting, is telling you our Easter tightening dissents.
They had the Mester with the Easter dissent. Is telling you that that's the forward guidance. That's the way they're moving towards being more hawkish. And that's what you want to flush out at the press conference. Not asking the chairman question after question after question, cuz he's only one of 12 voters.
Well, I think the market clearly did flush that out. I'm just looking at Fed Watch pricing, and Jack, maybe you can pull this up on your screen. And I think what's interesting is I'm looking out at at April of '27. So, next year, a year from now, what do we have in terms of the change of pricing? And if you look at a day ago on April 28th, we had a 73% 74% chance, if you round up, of rates staying within their current range, and actually about 20% a little over 17% chance of of cuts, of one or two cuts.
And if you go to today, staying in the current range has gone to 55%. We actually have over 40% chance of hikes priced in 1 year from now. So, we had a pretty decidedly pretty decided flip from dovish to hawkish as a result of this. What do you attribute that to mostly? Is it those dissents, or is it Powell sticking around?
No, I think it's more about the economics of what we're about to face. And I think that the, you know, one of the things, and I'm I'm going to now pivot to the war. And I'll give you my my my bottom line up front. And I'll be happy to explain it, but we don't have a solution for the Strait of Hormuz.
We don't know what to do. We being the US military. And it's going to stay closed for [snorts] an extended period of time. And oil prices are going to stay That's why oil prices are going up, and they're going to stay elevated for an extended period of time. The consensus view since the first week of the war was it'll end by next week or in 10 days.
And we're still saying it's going to end by next week or 10 days. Today was supposed to be the day Donald Trump said that all of the wells in Iraq were supposed to explode cuz on Sunday he said in 3 days they're going to run out of storage and then the wells explode. I'm still waiting to hear if any wells exploded to hear today.
I doubt any of them have. It's not That's not the way it works. And that we're we're under this narrative now that we're going to put enormous and economic pressure on the Iranians. They're going to cave. They're going to run to the table and say whatever you want. We just got to get the oil flowing.
We got to get the money flowing because people need to be able to buy bread. I will argue to you the Iranians don't care about that. They just don't care. They're not digging in. They're digging in and they the amount of pain that they're willing to take even if the blockade is successful, we're underestimating and that this blockade and this inability to move oil or goods of any kind through the Strait of Hormuz is going to be with us for a longer period of time.
Now, where do I see that in markets? I would argue that I see it in markets in two places. Look at the December 2026 um Brent crude oil futures contract. It made a new all-time high. The June contract today made its highest level since June of 2022. So, almost a 4-year high right there. But the December contract, which is 7 months out, is still in an uptrend.
It's still making new highs. So, for all the talk, well, this is going to be temporary and then everything's going to go down, the December contract, you've got it there. It's almost $90 right now. It's telling you we're going to be at above 90. going to have well average way above $90 on crude oil for the bulk of this year right now.
And if you look at that chart that's on the screen, it's still in its uptrend. It's closing high was today. That market is not pricing in an imminent end to the war and that prices will then deflate anytime soon. So, that's one thing. The other thing I would argue, and I'll get a little wonky on you here, is if you look at the defense stocks, the prime defense stocks, the Boeings, the General Dynamics, the Lockheed Martins, the Raytheons, the RTX, um and the like.
Um and there's a chart of it. And if you look at it since the end of February, um if you want to put that on a 6-month, you could probably see it a little bit better. Uh it but if you look at it at the end since the end of February, those stocks have been going down. That is unusual for these stocks to be going down.
That typically when we are in a war, especially a shooting war, defense stocks do good because if nothing else, you got to buy more of Tomahawk missiles from Raytheon and you know, we got to replace broken equipment and used up equipment that we need. We need to buy a thousand more, you know, THAADs and um you know, and and and Patriots and the like.
But they're underperforming and so are the European defense contractors underperforming. The narrative that I subscribe to is we are finding from Ukraine and the Strait of Hormuz the 21st century war is vastly different than 20th century war. And these big expensive platforms that we use like F-35s and uh aircraft carriers and the like are good for some things, but they're not good for other things and that is asymmetric decentralized war.
That's a fancy word for saying they shoot you know, cheap drones at us. And Trump dismisses them as toys and paper airplanes, but the problem is they shoot hundreds of them at you. And they're betting they've got more drones than you've got the ability to shoot them down. And even if you're 100% at the end of the day, they own you then when your magazine is empty.
And that is being exposed, and that's why the defense stocks are going down. As a validation, we should have a different kind of mentality about this war and a different type of way to fight this war. And the last thing I'll say about that is somebody does. It ain't the Israelis. They might be worse than us when it comes to understanding 21st century war.
They almost had an helicopter blown up by a drone two days ago, and it was clear they're not actually taking the drones that seriously. But it's the Ukrainians. Ukraine has 700,000 Russian troops in their country. And the Ukraine's through their advancement with drones and defensive shields with drones is basically fighting Russia to a standstill.
And might even actually be turning the tide in their favor, and that's what Trump talked about today, that Putin might be open to a ceasefire. Reason he's open to a ceasefire is he's on the verge of losing that war. And he's on the verge of losing that war because 21st century war with drones and everything else is vastly different.
They have the answer. We don't. That's why Zelensky is in every country around the world. Germany last week, India a couple days ago, the Gulf states before that, cutting security deals. Cuz the world is starting to say, "When I need to get the most advanced tech when it comes to defense and weaponry to protect my interests and my country, the answer might be Ukraine.
It's no longer the United States or Europe. It might be Ukraine right now. Doesn't mean we can't catch up, but it does mean that we are behind the eight ball, and while Ukraine is able to neutralize Russia in Ukraine, we don't know what to do about the Strait of Hormuz. So, all the ships sit there. We talk about a blockade hoping that we import we put so much economic pressure on them that we get them to the table.
We don't have a military solution to opening the straight. If we're wrong that their ability to take the pain of the blockade is a lot more. This goes on and on and on. And that's what I think you're seeing in the December contract when it comes to crude oil. So, Jim, that's a really interesting point about you're basically saying, you know, tanks schmanks and that a lot of conventional warfare tools that we have right now it's kind of like, you know, using horses in World War I or or World War II.
It's it's a little bit antiquated and especially these new drones can take out a lot of stuff that are really really easy to to make. Jim, unfortunately, we've got to go shortly. We're going to take a little bit of a break before we go to Vlad Tenev at at 5:15. So, in 14 minutes. But my final question for you Jim is what is the trade in this environment that we have now if you're right that unfortunately, you know, the war is going to continue and that the Strait of Hormuz will continue to be closed.
You mentioned December crude oil. I I you know, happen to say I actually happen to be long like exactly that that contract of of December crude oil. You know, I hope it goes down because the war is over. But um just just you know, when you scan the universe of bonds, stocks, gold, oil, what is the trade that you're seeing?
You know, I perhaps the the first answer you you might be tempted to say is your ETF WTB. Okay, but you can't say that. entire macro things, what's the trade, Jim? Well, you said it for me. Yes, WTB. WisdomTree is my partner. But actually, I think that the answer is is that what I just was you know, riffing on a second ago.
I think that this war is going to be protracted. I think that oil is going to stay elevated. Look, I want to be wrong about this. I you know, but I'm trying to be realistic. I do want to be wrong on this. I don't want this war to last last, but I'm afraid it will. Oil will stay elevated, inflation will go up, interest rates will continue to trend higher.
By the way, in the last 5 minutes, the 30-year bond just touched 5% for the first time since July of 2025. Um uh and so I think that we're going to continue to see interest rates move up. Now, the question I'll have for you is so long oil, long DBC, which is I'm long that in my PA, my personal account, which is the Deutsche Bank commodity index ETF.
Um or some or something like USO, I'm not long that, or something like that. I also think interest rates might continue to head higher. We are positioned for that in WTBN to some degree um right now. Uh but then the question becomes, what does that mean for the stock market? That I'll defer on. That I'll punt.
Because you're going to have everybody talking about AI changing the world against higher inflation and higher interest rates. And those two mega forces are going to meet. I'm not exactly sure which force is going to win in the stock market. So, I'll punt on that one. But I'll say higher commodities, higher oil, and driftingly higher interest rates will continue to be the order of the day.
Thank you, Jim. People can follow you on X at Bianco Research and you will be they should check out your your your research that you do.
Comments 0