Trump says the Iran deal is “over.” Doug and I think we’re living through the largest economic shock of our lifetime. So why is nothing happening yet?
Trump just called the Iran MOU dead. “To me, I think it’s over. It’s just a waste of time.” Three ships got hit transiting the Omani side of the Strait, the U.S. answered with its largest strike since April, and Iran hit back at U.S. bases in Bahrain and Kuwait. The ceasefire everyone was hopeful about is gone.
Doug and I sat down to work through where this goes. The short version: he doesn’t buy a word of the official story, he thinks oil goes much higher, and he thinks the quiet we’re living in right now is the dangerous part.
Nobody can find it on a map
Here’s what keeps nagging at me. This started in late February. It’s July. And there have been no consequences. Oil’s cheap. Airports are packed. Restaurants are full. The highways are moving.
Doug: “It looks like this is kind of just something that’s happening off in the Middle East in countries that most Americans can’t find on the map.”
I’ve said this is the largest economic cataclysm of my lifetime, and I still believe it, even though we haven’t paid for it yet. It reminds me of early 2020. You could see the tidal wave coming if you were paying attention. The market wasn’t awake to it. Then it hit the shore and everything changed overnight.
The Strategic Petroleum Reserve got drawn down another 6.4 million barrels last week, to its lowest since they started refilling it. Absent some collapse in demand nobody can find in the data, we’re running a deficit. You can paper over a deficit for a while. You can’t do it forever.
Oil is the whole game
Doug: “Oil is certainly the most important commodity in the world. Everything runs on it… I do think that they’re being underrated at this point.”
Doug’s playing it directly. He’s long bull spreads on oil to keep his hand in, and he’s long grains, because grains are oil in disguise: diesel to plant and harvest, natural gas and oil for fertilizer.
He went on a great tangent on why grains are still cheap. After WWII, U.S. farmers got about 40 bushels of corn an acre. Genetics, chemistry and fertilizer have pushed that to 160–180. Wheat acreage is down something like 60% from the postwar era for the same reason. But farmers aren’t making money, and this oil squeeze lands right on them. His read: we’re near the end of the road on cheap food.
Iran just had its 9/11
The part the market is completely mispricing is the human one. Doug and I both remember how Americans felt after 9/11. Roughly 70% backed invading Iraq, a country that had nothing to do with it, because the public demanded that somebody pay.
Now flip it. Iran just had that moment. By the estimates flying around, somewhere between 9 million and, in Doug’s telling, up to 40 million people came out to mourn Khamenei. A regime that was arguably cracking is now united by attack.
Doug: “Signing an MOU with the US is very much like if the US had signed an MOU with Japan after the Pearl Harbor attack.”
That’s why I don’t see them backing down. Iranian leaders who bend on the Strait don’t get sanctioned. They get assassinated by their own side. There’s no political room to be reasonable, which is exactly what makes this so dangerous.
And Doug threw down his usual marker on the wider region:
Doug: “I’ll bet that Israel isn’t gonna be around in 10 years in nothing like its current form… It’s in a lot of trouble.”
The second-order dominoes
This isn’t only about a chokepoint. It’s the whole financial plumbing around it. Gulf oil revenue is down, and a lot of those states carry debt to service, which means selling assets into a market they’ve spent years feeding with fresh capital. Doug wonders aloud whether the Middle East is starting to run out of money. The Saudis just cut their losses on NEOM, the 100-mile line in the desert.
Layer on Russia and Ukraine. Ukraine just hit Russia’s largest refinery, 420,000 barrels a day of capacity, and there are now reportedly gas shortages inside Russia, of all places. Meanwhile Europe is doubling defense budgets and talking itself into a war Doug sees no rational basis for.
Doug: “War is the health of the state.”
Weak leaders love a big external threat. It’s the oldest move in the book.
What Doug’s actually doing
We spend a lot of time on the gloom, so here’s the part that matters: the positioning. None of this is a recommendation. It’s what Doug told me he owns and why.
Oil producers and physical oil. Still long the producers, looking at speculations in physical oil.
Grains. Still long, for all the reasons above.
Gold producers. Still long. His standout: Newmont, the largest gold producer, at roughly a 9-to-1 P/E, which he calls a historic low. “That’s very cheap for any stock, but especially for a gold stock.”
A hedge against the everything-bubble. He likes the idea of the leveraged bear semiconductor ETF (SOXS) as a hedge. It’s down around 97% over the past year, from roughly $160 to about $4.50, but still has real money in the fund, so it’s not going away. Semis are the most overpriced corner of an overpriced market.
A short on the mania. Doug thinks SpaceX is an accident waiting to happen at something like 100x revenues. It got into the NASDAQ-100 only after the rules were changed, and it fell on its first day in the index despite all that forced buying. “That’s actually not a bad short at this point.”
Steady as she goes
Where does that leave the rest of us? Take less risk. Hold more cash if you can. Own hard assets, especially gold. I keep coming back to the same image: a tsunami forming offshore from the single most significant economic event I can think of, while everyone on the beach enjoys the sun.
And Doug, as ever, zoomed out one more level:
Doug: “On top of that, we’re looking at very possibly World War III… You know what Einstein said. ‘I don’t know what World War III is gonna be fought with, but World War IV will be fought with sticks and stones.’”
Maybe we super-bears are just broken clocks. Doug’s answer to that is: broken clocks don’t have reasons. These things have reasons.
We’re back Friday with your questions. If you’ve got one for Doug, head to crisisinvesting.com, click “Ask Doug” at the top, and post it. Subscribers, we’ll get to as many as we can.
