I was expecting Warsh to sound a little hawkish, to make up for what he admitted were some “mistakes” during the first parts of his tenure. In particular, he sounded less committed to the inflation mandate at the last meeting. I want to discuss my take on Warsh’s Jackson Hole speech, in the context of my read on Warsh.

But first, the Week(s) in News:

· This was from the prior week, but it seemed a little strange that Trump would pick now to (re)start a trade war with Canada. This is not going to be helping the perception of lower inflation, for the consumers or FOMC members. Perhaps he wanted to apply pressure for a deal before the midterms, but having a 2027 effective date pretty much ensures nothing will get done by the midterms.

· Apparently, we “leased rights” to 55% of Venezuelan oil. War crimes and ethics aside, if you extrapolate this kind of gain to Iran with any kind of reasonable success probability, you can see why Trump did what he did. I mentioned previously that as a pure probability game (war crimes and ethics aside), it was probably +EV to attack Iran. So I am not going to be crying about it that Iran didn’t work out (war crimes and ethics aside), and we are in this quagmire. As a trader, I stop being results-oriented. Because if I’m not screaming that we need to return Maduro and Venezuelan oil, it makes no sense to lose my mind over Iran (war crimes and ethics aside).

· Payrolls were revised down again. It’ll be interesting to see how this year’s spike in jobs eventually gets revised. On the one hand, we could see more of the same downward revisions. On the other hand, it’s not clear if AI will cause an increase in self-employment.

· The September meeting is mostly a coinflip right now (leaning towards a hike). The CPI data will be the major determinant of whether we get a hike. The average WTI price for May was $102.13, June was $84.81, July was $80.46 and August about $83.7. So you would expect a bounce in August CPI, after drops in June and July. There is some residual oil pricing in the core CPI figure, so I would expect some tailwinds to the core CPI AOTBE.

Warsh Tells

When playing poker, you have to size up someone at the table based on limited information. From a small sample of hands, you have to determine how they think, and what actions they will take under various circumstances. The distinct impression I am getting is that Warsh is a “parrot.” IMO, much of what he seems to be saying seems to be coming from the three main influences in his life:

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The prevailing market narrative is that things are looking pretty bleak right now for Trump’s War on Iran. Most pundits are saying we “lost.” Sometimes, I feel like the markets think the oil markets (and by extension the interest rate markets) should trade as if “Iran winning” is proportional to “higher oil” (and higher rates) and vice versa. While this is probably true on an AOTBE basis, it seems to me that if we “let Iran win,” that would result in LOWER oil. Iran would implement their 7% toll, and oil would… collapse! It is only when there is conflict that there is the risk of massive escalation, and a more meaningful risk of a tail spike. You can argue that “America will never lose” or “Trump will never give up” or whatever. Therefore the War premium will always exist in both oil and rates, barring a deal. I don’t disagree.

I was an economics major, so I like simplifying where I think pricing will be under various scenarios. It occurs to me that rather than “Iran win – BAD” and “US win – GOOD” there is a better way to look at the possible range of oil prices. Below is a stylized chart of where I think oil would be in different scenarios. The red line is under an escalatory War where large amounts of facilities are destroyed for many years. This would be the “doomsday” scenario that many oil traders have predicted for six months now. This can occur with either side “winning.” I think the rest of the world would eventually adjust – on both the supply and demand side, preventing oil from being hundreds of dollars. The blue line is under a Deal, where oil will subside back close to previously low levels, but staying supported from every country attempting to replenish their reserves. Iran winning would imply some form of (increasing over time?) toll, which would keep oil slightly elevated from before.

Obviously, a Deal is best to keep oil prices at bay. And I completely acknowledge that $170+ oil is possible if Iran and/or the US start blowing up oil facilities. I get the feeling that the oil markets are thinking only in terms of the red and blue line. However, I think some version of an intermediate equilibrium yellow line is possible.

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The Middle East is in flux, and there are a wide range of possible outcomes, from peace to further escalation. I’ve said for months now that Iran doesn’t matter - oil matters. So it shouldn’t be a surprise that my next hot take is that happens with Iran doesn’t matter (much), but surprisingly, I think we have found a “highly probable” equilibrium range for medium term oil, so oil may not matter much either, unless we get a tail event.

Before we get to the Week in News, the Blind Squirrel has gotten another nut! I said a few months ago that it wouldn’t surprise me if we got a negative payroll, and sure enough, that’s what we got. I wasn’t sure if I used up my Blind Squirrel luck the month before, when payrolls were negative with revisions. Nope – the negative payrolls happened, plus another 103K downward revision to prior months. [Insert Blind Squirrel dancing gif here]

Below is the Week in News I thought interesting:

· I was listening to a Doomberg podcast, and he made the case that the elevated oil markets are pricing in oil infrastructure destruction probabilities, and not a central scenario. That’s probably a good way to put it. I think the status quo could be an equilibrium. If you made me choose, I think it is way more likely to come to peace tail, rather than destruction tail.

· On Saturday, Iran essentially demanded the same things they wanted after the MOU, with the addition of the 7% fee for transits. It’s basically the Iranian version of the gibberish Trump says when he claims to have gotten “everything” from Iran. This is why my hot take on why we may have found an equilibrium in the status quo, with no peace, is important. When they were asking for $1 per barrel, walking away seemed fine. But 7% is a little too much to walk away. I still have no idea why we don’t just declare victory, keep the blockade and reserve the right to blow them up once in a while. Oh wait. That is what we are doing now, and we seem to be getting enough oil out to be fine.

· The API CEO said 7mbd passing through Hormuz. As I’ve mentioned in past issues, that is plenty, assuming Saudi Arabia can still get most of their oil out of the Red Sea. I’m no Houthi expert, but the oil price action seems to be indicating that they are getting enough oil through.

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I like thinking about non-consensus market views. Prepare for some hot takes in the next couple of issues. I am starting to think that some things that the markets are focusing on just don’t matter... or at a minimum, matter much less than the markets think. The most important things the markets were focused on this past week were Warsh and the FOMC meeting. I want to present some arguments as to why Warsh may not matter much.

But first my rates takes in the Week in News:

· A lot was made of the THREE Hawkish Fed dissenters. Given that the July meeting was about 36% priced, I think it would have been reasonable to assume something on the order of 36% dissents on a no-move. We only had 3. I don’t understand how the narrative around the dissents was “hawkish” when the two known voting hawks plus another Bank President were the only ones to dissent. It’s not as if a Governor (representing the main mass of the FOMC) dissented.

· Warsh was out saying he is considering fewer meetings per year. The knee-jerk reaction was a rally in the front end, as fewer meetings could mean fewer hikes. I am not sure this is true, as the Fed could go 50s if there are fewer meetings. Or if the Fed was intending to go 25 per quarter, they may decide to go 25 every meeting if there are 6 meetings a year. I don’t hate the idea of 4 or 6 meetings a year, as we would have a uniform amount of data in between meetings. Warsh does not strike me as the kind of guy who would make this decision unilaterally, and it’s unclear the US central bank should make a break from the other world banks without a clear benefit.

· For a couple of weeks now, I was wondering if Trump had an Iran Plan, or if he was “insane” for trying the same unsuccessful tactic repeatedly and expecting a different result. I am now moderately leaning towards the latter. I do think facilitating escorts was part of the Plan, and I do think ships continue to transit the various waterways despite the War. However, it appears Houthi involvement was not properly accounted for, unless you consider “hope” (of noninvolvement) is a plan. It probably wasn’t a coincidence that Trump stopped attacking when the Houthis escalated. Trump TACOed on his alleged massive attack on Iran. I could see attacking power plants as part of an “aiding escorts” Plan, since energy is required to detect and attack. Iran media denied progress towards a deal, but this is what they said before the ceasefire and MOU, so the actual developments next week should be interesting.

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A few weeks ago, my son’s friend wanted to start investing and asked for my advice. He recently graduated from high school and wants to major in business in college. I hear the environment for getting a good business internship is as crazy as getting into a good college. I gave him some of the usual boring takes, like the importance of compounding, diversification, target date investing, tail protection, etc. But you know Uncle Joe is going to have some out-of-the-box nuggets!

But first the Week in News:

· The Houthis attacked Saudi Arabia. I mentioned this as the major risk to my view last week. I’m less concerned about the Bab el-Mendeb and more concerned if the Houthis can consistently attack oil ships headed towards the Suez. That would be a problem.

· Trump imposed a new wave of tariffs, based on “forced labor”. This combined with War escalation was a double-whammy on the front end of the curve. Everyone should have expected some replacement tariffs for the ones that were disallowed by the Supreme Court earlier in the year, but the announcement timing during an escalating War was unfortunate.

· ECB kept rates unchanged, saying the uncertainty level is high. It is jarring how there was no hike expected in the EU (who are more susceptible to oil shocks and have a single inflation mandate), but the Fed is 38% priced for a hike this month.

· Last week, I suggested that Trump may have a plan to strengthen escorts. That narrative got a little support from the announcement last week that: (1) any future attacks on future shipping will result in an attack on a bridge or a power plant, and (2) any damages done will be paid with Iranian frozen money. Of course, some details weakening that narrative include: (1) the Dept of War needs more money, and (2) Trump was sounding less confident in a recent interview (like he doesn’t know what to do). I’m not sure we have the money to do (costly) escorts.

· Apparently we didn’t attack yesterday, so we may get some interesting new news to evaluate.

CA Investing Advice for Teens – and Adults

Here are some non-traditional takes on investing for teens:

Why Active Investing is Worth Trying

\Who knows if the people who were destined to be the best investors of our generation decided to go into accounting/teaching/firefighting and just put their money in a safe target-date retirement fund, as they were told to do? Joefucious says, you don’t know unless you try.

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The ceasefire is over. The markets are getting concerned about oil again. I’m not sure that should be warranted. There’s that old saying that the definition of insanity is doing the same thing and expecting a different result. We know that the later bombings before the cease-fire did little to advance our cause, since most of the high-value targets were gone. I’m going to give our US military some credit and suggest that there is a “Plan.”

But first, my thoughts on select news items the past week:

· CPI and PPI came in lower. We didn’t get much of a fixed income rally because of the increase in oil futures on the week. Given that July oil is on average lower than June oil, I’m not sure the markets should be pricing in so many hikes.

· I didn’t get much out of Warsh’s Humphrey Hawkins testimony. As I’ve mentioned before, the employment mandate is not a factor, so the Fed is focusing on inflation. They always say one month of data doesn’t matter, so Warsh dismissing one print should not be a surprise. However, I do expect the next payroll to be weak (from giving back World Cup jobs) and the next CPI to be muted (from still-lower oil prices, AOTBE), so let’s see if the Fed narrative changes with TWO months of weak payroll and inflation data (assuming that’s what we get).

· Several GOVERNORS (Waller, Jefferson, Cook) indicated IF we don’t see movement on inflation, they are prepared to move. I’m going to give some perspective here… despite how high oil has risen this month, the average oil price this month is still noticeably lower than last month. I’m not sure if the markets understand the meaning of “IF,” but it’s going to take a material Iran escalation to get oil (and inflation) higher. We also had a number of the hawkish FOMC speak late last week, so those sound bites need to be discounted.

· The Chinese developed a “free” AI alternative to the US. Kimi performed extremely well in AI tests. As I previously mentioned, it is not clear how the US AI companies will make money, when “free open-source” versions of Chinese AI models are available. I’m not saying we are in a “bubble” – it could take YEARS or DECADES for equities to converge. I just think it’s foolish to think the Chinese won’t ALWAYS be AT LEAST close.

Iran Plan?

I am assuming “Plan” can’t be something as absurd as “we’ll blow up more things, until they cave.” We did this for a month or two prior to the ceasefire, with negligible results. The regime doesn’t care if the people suffer. There has to be more than that. Otherwise, the recent attacks will just end up costing US more in a larger “reconstruction fund” during any peace negotiations.

It’s probably not a coincidence that Iranian hostilities grew during Khamenei’s funeral week. That’s when the revenge and death threats toward Trump came out, followed by some shipping attacks. When you have your political and religious leader killed, a people as proud as the Iranians are not going to stand still.

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The machines are taking over the shape of the SOFR futures curve. I wrote about “clues” that something may be awry last week. This feels like the plot to every machines-destroy-the-world movie, where you first have machines assist (in the making of curvature markets) and now they are taking over (and determining what the curve should look like). This week, I had a chance to take a closer look at the markets and consider some further clues regarding the way the markets have been trading. Regardless of the markets you trade, you should be aware of the principal Algos operating in your products. Only then can you understand how to profit around them. I’ll be back.

But first the week in news:

· Warsh chose his Fed task force committees. You can read the details from your favorite periodical, but the consensus seems to be that the members are for the most part very qualified. The members of the inflation task force are considered hawkish overall, but these changes are going to be more of a 2027 story. Not only do the task forces have to come up with proposals (which could take most of the year), but the proposals have to be voted on by the FOMC. So it could be some time before there is any material change on the Fed. ChatGPT summarized implications as follows:

o Communications: The highest probability of near-term change. Less reliance on detailed rate-path signaling (SEP/dot plot), greater emphasis on uncertainty and reaction functions.

o Data: The most underappreciated change. If the Fed begins incorporating more real-time administrative and private-sector data, markets may gradually shift attention away from a handful of monthly releases.

o Balance sheet: Potentially the most consequential over the medium term. A smaller structural balance sheet and a rethink of the ample-reserves regime could affect money-market dynamics, Treasury financing, and reserve demand.

o Productivity: Higher estimated productivity growth could imply lower inflation pressure and a higher sustainable growth rate without overheating.

o Inflation framework: This is likely a longer-term project. Reassessment of flexible average inflation targeting (FAIT), with a possible return to a more preemptive approach to inflation. The inflation panel is supposed to be hawkish, but a removal of FAIT seems dovish to me (since we are coming off a time where inflation has been noticeably elevated).

· The NY Fed reported that nearly half of businesses that pay tariffs directly plan further price increases. So tariffs may impact prices for a few more months (up to a year). This would explain the deeper bear-flattening we got this week, as hikes are more likely and eases are less likely. I’m not sure how court-ordered tariff refunds play into all of this. Plus, I would have to question results that came from a business survey in May. Was there something going on that would have caused businesses to be concerned about prices in May, like a WAR?!? May is when we had peak oil prices. Even with “sophisticated” statistical methods, I’m not sure the survey respondents are that careful in distinguishing price increases between tariffs and War. Not to mention any partisan bias in reporting. So I’ll be interested to see how core goods inflation next week will come out compared to the 0.22 mom average in prior months.

· I was surprised when Trump said Friday that the cease-fire is over, and the oil markets sold back off (fractionally). I have been saying for some time that “Iran doesn’t matter, the oil matters,” and that we appear to be able to escort enough ships through the Hormuz to keep oil prices stable (even before the MOU). But I would have thought this length and degree of an impasse would have caused a larger spike in oil.

Algo Wars

Perhaps the Wall of Regressions I posted last week wasn’t the best way to convey to the general public about why the yield curve has been trading “strangely.” Perhaps. Since a picture is worth a thousand words, I would like to present two charts.

Below is a chart of three selected generic 1-year calendar spreads – the 4^th, 6^th and 10^th. The relevant timeframe to look at is between mid-March and mid-June, since the futures contracts roll, and you start comparing apples to oranges. There are other caveats, but I don’t want to get into those details now.

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I have been saying to institutional clients that the front of the yield curve has been trading “strangely” the past few months. I haven’t been able to pinpoint why the movement of the shape of the curve has been atypical, but I finally have some clues.

But first, the week in news:

· Payrolls came in much weaker than expected, but the Unemployment Rate fell. We will find out in ensuing months how much the World Cup added to payrolls, as those jobs will have to be removed. We may have started to see some of the WC “planning” jobs removed in last week’s data. There are still no signs of inflation pass-through to wages, which is one of the factors that the FOMC considers before hiking.

· Lisa Cook received a favorable Supreme Court decision, but Trump still vowed to go after her. This seems slightly counterproductive as the case could take about a year and this could cause Powell to stay longer. Since Powell is now just a Governor, I guess Trump wanted to go for the 2 for 1 Special.

· I mentioned this last week, but more places are suggesting that the removal of forward guidance will cause vol in front end to increase, and/or vol in longer end to decrease. As I discuss in today’s main essay, SFR6 (the 6^th 3mo SOFR interest rate future) didn’t seem to get the memo, relative to SFR10. The logic of the Fed’s Summary of Economic Projections holding members to their rate view makes no sense, since they regularly change their dots – sometimes by a lot (see June). I like having as much data as possible to make the best decision possible, and it is disappointing that we may get less information.

· Warsh sounded less hawkish at Sintra. He said inflation risks declined the past 4 weeks and mentioned AI.

· I was surprised that Bowman (who is Trump-friendly) was thrown under the bus for participating in a closed-door conference before the FOMC meeting. I’m not saying she wasn’t wrong. I thought Trump protected his allies, but maybe this is a move for “appearances.”

A Note to Readers

The Curve Advisor began as a way to organize my own trading thoughts each week.

As markets continue to evolve, I’ve begun thinking about how I allocate my time. The value of the newsletter has always been the discipline of organizing my own trading process. Occasionally, that process leads to an observation or trade idea that meaningfully changes how I think about the curve. One differentiated insight can have an outsized impact on long-term performance.

As a result, I’m evaluating whether Curve Advisor should continue as a broadly distributed publication or evolve toward a model centered on a smaller number of direct institutional relationships, potentially with a greater degree of ongoing interaction. No decisions have been made, but if you have thoughts on the future direction of Curve Advisor or would like to discuss institutional access, I’d be happy to hear your feedback (CA@CurveAdvisor.com).

A Clue!

I was originally going to write this for just the institutional version of the newsletter, but then Lazy CA realized he would have to write something else for the main blog this week. I’m as patriotic as the next guy, so that was not something I wanted to do on the 4^th of July weekend. I decided to include the first part (overview) of the writeup in the general blog. I think this will give you a flavor for some examples of ancillary considerations when trading interest rates.

I had someone do a regression (of values) of various SOFR futures calendar year spreads over various time frames. SFR6 is the 6^th SOFR 3mo interest rate future. One of these things (betas) is not like the others. [cue Sesame Street music]

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The market seems to be convinced that Warsh is a hawk. I’m not saying what few words he said at the post-FOMC presser didn’t lean hawkish. But wouldn’t you expect every central bank member to be firm on inflation expectations, when facing higher inflation? I don’t know the man. But I do know this… we need to get further concerning data for Warsh to want a hike right before the midterms, as the markets are almost fully pricing in. I discuss all the narratives going on about Warsh and the FOMC and then discuss my unconventional narratives. I also share my thoughts on the first week following the MOU.

But first the week in news:

· Next week will have three very interesting developments: (1) whether the US and Iran will finish their little spat, (2) the World Cup payrolls, and (3) the Supreme Court probably ruling on Lisa Cook. Tail risks playing out on any of the three items could have severe repercussions.

· Williams said, “Given the elevated level of inflation, it is imperative that we restore it to our 2% longer-run goal on a sustained basis. The current stance of monetary policy is well positioned to do that.” That basically puts Williams firmly in the “no move” camp. He is probably the 4^rd or 5^th most important person on the FOMC, after Warsh, Powell, and maybe Jefferson or Waller.

· Kashari identified himself as the one hike dot. As mentioned in the past, the Fedspeak following the meeting is more of dot identification.

· Bloomberg thinks the next payroll will be 200K. That is high, but the World Cup did start last month, and activity reviews seem to be positive.

Warsh?

There is no doubt that the market narrative is that Warsh sounded hawkish and the dots were hawkish. For three months now (soon to be four), we have had very solid payrolls. The employment side of dual mandate that had previously given the Fed a tension between their two mandates is now gone. As a result, it is “reasonable” for the Fed to only discuss the one mandate that is out-of-line.

If you look at the “Value on the Curve” section, I show how the tone from Wall Street shifted towards higher rates. The question is, how hawkish were they?

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What an eventful week – we got the MOU signed and we got our first look at the new Fed Chair. Both went slightly better than I thought, although I didn’t have high expectations for either. I have opinions on both of these developments.

But first the Week in News:

· I thought Warsh did a good job at his first meeting. It is clear he had to manage a hawkish revolt from about half the members. He doesn’t believe in forward guidance, so he didn’t say much. I liked his committee approach to tackling some of his proposed changes. Having the other members participate will help develop buy-in. Of course, if he starts jamming all of the committees with his Project 2025 buddies, that could backfire on gaining FOMC acceptance.

· I thought an interesting quote that no one talked about was when he said “You’ve heard me say before I tend to focus on the left of the decimal point. Well, the ‘two’ is the left of the decimal point. For now, zero is to the right.” That is mostly hawkish to say that you want to get to a 2.0% target. However, when he says, “for now” it’s not clear WHEN/if that could change. I’m wondering to what extent the formation of committees, the focus on trimmed mean and that weak house legislation on trying to change the Fed to a single inflation mandate are all about trying to create the path for a rate cut. But this is all in the medium term.

· Warsh’s most hawkish comments related to a focus on inflation fighting: “We will deliver on price stability.” Every FOMC member (“unambiguously and unanimously”) needs to think that (especially in light of the stronger employment data) to maintain inflation expectations. But this focus on inflation could a double-edged sword, if inflation collapses. Gas was below $4, and assuming both sides keep to the MOU, it wouldn’t be crazy to think oil and gas couldn’t go lower.

· The market extreme reaction in the front end was an interesting example of why forward guidance (in the dots) may cause MORE volatility. This is especially true if the post-MOU and post-World Cup data becomes more subdued. The market’s more muted reaction in the longer end could be an example of how forward guidance could cause LESS volatility in the longer end of the curve.

· The US and Iran both signed the MOU, and should start discussions over the weekend. I’m assuming this Lebanon skirmish will blow over sooner, rather than later, so for now, I’ll just put that tail risk on the back-burner. I am assuming Iran didn’t just sign the MOU to collect a small piece of the unfrozen funds and to get a few tankers out. I discuss the War further in today’s main essay:

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I think I’ve done a pretty good job of analyzing the positioning, dynamics and risks of the Iran War the past few months. Of course, that doesn’t lead to a conclusion about the outcome… until now. I’ve recently had two “a-ha moments” when it comes to the War. The first was the “speculation” that we were offering a $300B reconstruction fund, which could bring the total package for Iran to over a trillion dollars. Unless a complete unfreezing of funds and/or sanctions relief are not on the table, that is an enormous payday for Iran. That tells me Trump (aka “TACO Boy”) is motivated. The second is the recent revelation that we have “secretly” been escorting ships though the Hormuz. I previously discussed the importance of escorts in past issues. Iran is losing control of the Hormuz and their leverage, and so they are also motivated. While we are only discussing the signing of an MOU (and not the full deal), I will discuss why I think even without a deal, just the reopening of the Strait solves a majority of our problems.

But first a message from the Author:

Having grown up in NYC… KNIIIICKS!!! Let’s keep that on the down low, since I now live in Texas and all my neighbors have guns.

Now the week in news:

· Core CPI came in fractionally light (as warned last week) but PPI came in firm. Core PCE is supposed to come in around 0.4, but we knew there would be payback from the slightly softer print last month. However, with Hormuz flows possibly resuming on the horizon, I think the markets will be more forward-looking and ignore the short term inflation data, if Hormuz reopens.

· The European Central Bank was the first G7 central bank to hike. This may have contributed to some (relative) hawkish sentiment in the near-term. Maybe. But this should have been priced.

· Warsh leads his first Fed meeting next week. I can see arguments for either a hawkish tone (to keep inflation expectations anchored) or a dovish tone. But considering how Trump was out this week saying the Fed should ease, I lean towards thinking Warsh is going to sound close to “neutral” (in light of the high inflation data), but leaning on the dovish side, assuming a deal is still up in the air. He may even sound outright dovish if an MOU towards a Hormuz reopening is close (or done) by the meeting. The thing about nepo babies is that you rarely hear of back-stabbing in that world. Because if you are incompetent and the only way to get the job is with the help of those more powerful, you are probably not going to defy those who did you that favor. My main focus for the meeting will be Warsh’s tone, and his new plans for the Federal Reserve.

War A-ha Moment

I sent the following email titled “The Boy Who Cried Wolf” to institutional clients at the end of Thursday:

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Just when I think Trump can’t be any worse at negotiating… last week, he says he doesn’t care if there is a deal, and the same day he is screaming profanities at Bibi for attacking Lebanon and jeopardizing the deal. I wouldn’t say I was the best at live poker tells, but when someone behind me starts screaming at the table to be quiet during a hand, I’m pretty sure he’s not folding. Does he realize Iran can see this? As my son would say, “bruh.” Tell me you are desperate without saying you are desperate. I need a break from another full-length post talking about mentally and emotionally challenged people (one person in particular).

Since I wanted to putz around with AI more (like everyone should), I gave ChatGPT some newsletter samples and asked it to “write a newsletter in the style of Curve Advisor (samples included) that discusses the previous week in news that affects short term interest rate futures trading.”

But first the week in news:

· Since War is still the #1 story, I need to say something about the developments last week. Desperate Trump doesn’t give up. He throws a tantrum. Like that kid in the supermarket that really wants the Cookie Crisp “cereal,” and just loses his shit on the aisle floor. In our case, Trump occasionally blowing up a few Iranian targets (but not breaking the ceasefire) is the tantrum, not realizing all it does is just annoys everyone (mom (Iran), passers-by (ships), employees (neighboring countries), etc) without getting any closer to his goal of getting what he wants.

· As Trump says, the Iranians are tough negotiators. Without knowing all the details, it seems like Trump is offering a lot more than Iran could have realistically wanted. I am assuming the devil is in the details – since neither side trusts the other. It seems like Iran feels like if they take their sweet time, Trump will keep giving even more. That’s what having a time advantage in negotiations does for you. Or maybe Trump is putzing around trying to claw back pennies off the massive package. Or Iran can’t trust anything Trump promises (because he verbally takes it back). Who knows? So the deal may take a little longer than I thought last week, when the TRILLION DOLLAR offer appeared to be on the table.

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I am flabbergasted that Trump is considering a $300B reconstruction fund. Gemini says this is ON TOP OF sanctions relief (worth a $500++billion), and unfreezing their funds (worth $100B)? So we are offering a package worth a TRILLION dollars (or more)?!? That is 3+ times Iran’s prewar annual GDP. Seriously – WORST. NEGOTIATOR. EVER! How do you get to that scenario, when walking away costs nothing, resumes the flow of oil and lowers oil prices? Given the revelation that Trump is this stupid and desperate, we are presented with several more “outs” that Trump has with Iran.

But first the week in news:

· Cook said there are risk to both sides of mandate, but the overall risk was tilted toward inflation. She is prepared to raise rates if disinflation doesn’t reappear. Jefferson also thinks the inflation risk is higher (and the employment risk is lower). As hinted last week, it looks like the Governors are all leaning the same way – towards a neutral bias later this month.

· Musalem said that Fed policy is at or below longer-run neutral, and that risks have tilted more to inflation side of mandate. He said it would be concerning if there was no disinflation in next 1-2 quarters, and an interest rate hike may be necessary if inflation does not resume easing within the next 6 months. That would point to a potential hike at the December meeting. But this depends on the trajectory of inflation.

· It appears that Trump wants an easier conquest before the midterms, and he has his sights set on Cuba. He also posted a creepy photo of him and Greenland, but that could turn ugly, and he needs to an easy victory before the elections – not another drawn out (verbal) battle. Maybe Trump can get more leases in Greenland and spin that into a victory. He could squeeze Cuba by the midterms, to put the focus away from Iran.

· As you may have inferred, I don’t have the highest opinion of Trump, even though I am a conservative. And I am not alone. If he ends up going to a Knicks game, the cascade of boos will certainly delay the game. He can’t even get “C” level singers to show up for our 250^th anniversary. That is sad. But I am going to say something positive about one of his vanity ventures. If Trump ever gets that $250 bill with his face on it approved (even though it is illegal to put a living person on our currency), go out and secure as many you can. That thing will be one of the most sought-after pieces of currency ever. See? Something positive. The first Democrat that wins will certainly end the printing, causing a massive shortage. I know from watching enough Antiques Roadshow and Pawn Stars that the limited print currencies are highly valued. There is a small tail risk the currency could get banned, but you can probably find some wayward MAGA buddy to still buy it off you for a healthy multiple.

More Outs

The reason why I am dumbfounded about this reconstruction and investment fund is that this is something you do WHEN YOU GET A FRIENDLY REGIME. Why would you set up a fund to build for someone that will hate you and you will see zero return? The obvious answer is that this reconstruction fund could be a way to skim money off the top for some in say, construction. In addition to taking bribes for contract allocation, I believe Messrs Trump, Kushner and Witkoff are all in the construction and/or money allocation business. Because when you start giving away stuff you probably don’t have to, you have to ask, “why?” As we’ve seen with the IRS fund scam, Trump is not shy about diverting funds to his buddies. It’s plausible that the details are such that we never have to pay out, or some other shenanigans. I (along with everyone else) have no idea how the fund will work. But let’s assume that this is a legit proposal to give Iran some money while benefiting US companies. We shouldn’t have to offer this money to begin with.

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“It’s déjà vu all over again.” This is about where we were a month ago, before Trump opened his yapper, walked back all of our promises and caused a further spike in oil. We look to a be on the precipice of a “major deal”… on a 1-page MOU, just so we can actually start talking about the details of the deal. Yogi Berra also said, “The hardest thing is to get started, but the hardest thing is to finish.”

Over the past week, oil was lower on deal optimism, but fixed income (in the short end) was lower. Given that these two have been negatively correlated for most of the war, this is an unusual development. The answer is a change in the perceived Fed reaction function this past week. I discuss this and how I assign probability distributions to interest rates during this war.

But first the week in news:

· Straight from the Godfather, Ivanka may have been targeted by the Iranians. I could totally see Don Don giving that speech “But I’m a superstitious man... and if some unlucky accident should befall [her],… then I’m going to blame some of the people in this room, and that I do not forgive.” I’m not saying this is why the “deal” happened. But we all who is Trump’s favorite, by default. Hint: it’s not the kid whose wedding he didn’t go to this weekend.

· NATO will consider an escort deployment if the Hormuz not open by July. This only has some support – it is not unanimous. So perhaps another of Trump’s outs will have more support.

· The Ryanair Jet CEO was on Bloomberg saying that Europe had enough jet fuel until September. So perhaps we still have some time. I have no idea what the situation of jet fuel in Asia is, but I still think the Iranians can wait us out. We get a test next week…

· Hajj is the entirety of next week (May 25-30). I’m not saying the leadership is going on a pilgrimage to Mecca. I’m just wondering if they will use the “religious holiday” to be slow.

· As it is, there is chatter about a 30-60 day cease-fire/negotiating period. This is notably longer than Trump’s usual “two weeks” to get a problem solved. But as I mentioned, a BATNA of paying $1 per barrel on oil is not so terrible, and this could cause little progress after the initial fanfare on the MOU.

· 30yr fixed income caught a bid. It appears that getting a solid real yield was too much for many market participants to pass up. If you are a retired boomer who thinks Claude is an impressionist painter, are you going to buy equities at a zero equity risk premium or lock in 2.8% real (plus inflation)? This was particularly interesting in light of the front-end selloff.

Trading Rates in this War

There were THREE bearish events in fixed income this week:

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But first the week in news:

· Rubio said the “US doesn’t need China’s help” [with Iran] after the first day of the China summit. Let’s try a hand-reading (aka critical thinking) exercise. What is most likely to have elicited such a comment from Rubio?

o The US didn’t ask China for assistance regarding Iran, since everything is under control and we don’t need their help (as stated). But somehow China mentioned they would stop sending weapons to Iran and stated that they opposed tolls on the Hormuz.

o China offered to give naval, logistical and intermediary assistance, but we declined, since we didn’t need China’s help (as stated).

o We asked for help and Xi said, “xiongdi, ni zhen can” (Translation: “it sucks to be you, bro”) and offered us nothing.

That’s right! Only the last one makes sense, unless you are still wearing the MAGA hat that is two sizes too small.

· From the Macro Voices podcast, and my own musings last week, it appears that some in the markets were uncertain if China would be a material participant in the peace process. It appears not, and that may have contributed to…

· We had a massive bond market selloff, as SOFR futures sold off up to 30.5bps on the week. Global bonds all puked, as technical support broke down. Inflation data in many countries (including us) rose more than expected.

· Trump put gas on the fire by suggesting no federal gas tax. That’s a very thoughtful gesture ahead of elections, but the bond markets read that as “fiscal irresponsibility.” The bond vigilantes have been awakened! If only something could be done monetarily…

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Q: How do you keep a moron in suspense?

A: I’ll tell you tomorrow.

I’ve been saying for weeks that the time negotiating advantage was not on our side. We wanted an answer Friday, and it is Saturday night and still nothing. Unless the Iranians need days to read a 1-page proposal, it is obvious they are unconcerned about oil getting shut-in “in 3 days.” There was some CIA report leak saying Iran could hold out for 3-4 months before economic collapse. I haven’t read the report (because it is classified), but I am taking the over on that time estimate. I discuss my latest thoughts about the war and interest rates.

But first the week in news:

· Williams sounded very dovish. He didn’t see a reason for a hike (!) and sees 2% inflation by 2027 (!). While he has always leaned dovish, given the amount of uncertainty, I thought it was interesting this was his view. Joseph Wang mentioned that Williams always thinks inflation will be at 2% “next year,” and included a clown emoji. Perhaps. But he is one of the “Big Three” on the FOMC, so his opinion needs to be given more weight.

· The Employment Report was reasonable. It had something for the fixed income bulls (higher UR, lower wages) and the bears (higher payrolls). The leisure & hospitality added jobs for the second straight month, and I would expect this to be firm throughout the World Cup.

The Waiting Game

One of the skills I picked up in poker is to look at an opponent action and assign a probability distribution to: (1) what holdings they can have and also (2) what holdings they are unlikely to have. Iran is taking an unusually long time to get back to us. This is not even the full negotiation – they just need to review the 1-page proposal and get back to us! There are plenty of details that need to be explored. So the fact that Iran is slow means one of a few things:

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But first the week in news:

· The FOMC meeting provided little information. I was leaning towards thinking the Fed may move to a neutral bias, but it appears there are only a handful of members (3 voters and at least one non-voter) who wanted the switch. I think all it would take is another high CPI report. But the June meeting will have Warsh at the helm, so it will be interesting to see if Warsh can keep the hawks at bay.

· Warsh says he is not a fan of forward guidance. The lack of forward guidance could cause more volatility in the markets. This is because the markets will be guessing at the direction and magnitude of future moves. Higher volatility could mean lower asset prices, AOTBE. As a trader, more volatility could mean more opportunities. But I am not holding my breath, as it’s unclear if the rest of the FOMC agrees.

· Warsh apparently said during his testimony that more than 4 meetings a year was appropriate. I don’t see what would be gained from switching from the “8 meetings a year” stance that most central banks have taken. However, you should be cautious about trades that rely on the current 8 meeting time structure.

· Trump raised EU auto tariffs to 25% (again). This is why you can’t give Trump much in a negotiation. He has a dirty image, so everyone knows that anything that is agreed to can’t be relied on. It probably shouldn’t be a surprise that Iran took nuclear enrichment off the table (for now).

· The UAE quit OPEC. This could put downward pressure on the longer end of the oil curve, as it could take some time for the UAE to ramp up production from pre-war levels (assuming the War ends at all).

Blockade Stumbling Block

It seems obvious that the Don thinks the US blockade will be a huge success, as he seems to think it’s the Trump card in getting the Iranians to capitulate. A blockade can be effective over time. HOWEVER, there are a few things that should be noted:

· Trump’s limited experience with naval blockades has been positive, and could be clouding his judgement on effectiveness. The naval blockade worked well in Venezuela because they only have three neighbors: Guyana (who they have threatened war), Brazil (I doubt there is much commerce through the Amazon), and Columbia (who have had a tense history with). So in effect, Venezuela is an “island” so they are heavily dependent on the sea. Ditto for Cuba, which is an actual island.

· Iran has SEVEN neighboring countries by land. Plus, they have the Caspian Sea, by which they have access to two more countries (including Russia). Russia is making so much money right now that they are probably happy to provide as much assistance to Iran as possible to keep the standoff going. That is a total of NINE countries that Iran can actively trade with, WITHOUT THE BLOCKADED OCEANS. It is no coincidence that Persia was the center of global trade for millennia. In addition, Iran is part of China’s Belt and Road railway, so while China is not a direct neighbor, Iran still has access to trade with China. In other words, Iran has access to EVERYTHING. So while the ocean is how they get out almost all of their oil and conduct 70% of trade, they still have trade – especially since the US naval blockade does not include food, medicine and other supplies. Is the blockade annoying? Sure. Is it as critical as Trump is saying? Probably not.

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My head is going to explode if I hear some partisan dimwit mention “3D or 4D Chess” in the context of Trump ever again. Last week, Trump mentioned again that he STILL thinks you can reduce drug prices 600%! How has no one corrected him, so he doesn’t look like an idiot on national TV?!? Don’t tell me the other Doofi also have no idea. More annoyingly, we went from a “possible deal” to Trump causing talks to break down and eventually getting the only Iranian moderate kicked off the negotiation team. That’s a power move, right there. As long as Iran has the basic necessities (food, etc), they can wait longer than the global economies can. It is obvious now that Iran decided to stall (as I feared last week), and global pain will be felt in the coming months. This has some implications for trading.

But first the week in news:

· It should be obvious to all that there is quite a bit of insider trading going on. The Oracles of Doofi and their followers are clearly trading ahead of the news. This is not that different from the wealth accumulation by the ancient Oracles, but I digress. Traders should be on alert to unexpected moves in “obvious” news products (like oil, equities, and to a lesser extent fixed income). MOST TRADING IS A ZERO-SUM GAME. Your EV trading such products WENT DOWN in a zero-sum game where insiders are capturing a chunk of P&L. In addition to “regular” Trump optimistic comments, we cannot rule out the possibility that the administration is making comments just for the purpose of market manipulation and profit. Strategic adjustments need to be made.

· Speaking of Doofi, another cabinet member (Labor Secretary) bit the dust. I was obviously too conservative when I set my over/under of 1.5 more cabinet member changes by next January. I mean the bar was so low to get in – I assumed the bar had to be crazy low to get fired. I forgot to mention there is a decent tail on defections – when there is a sinking ship, what do rats do?

· Given the muted moves in the oil markets, it seems clear that some oil is still getting past the double Hormuz blockades. Rumor has it that Iranian ships were traversing territorial waters of Pakistan and India, that are not bound by international water rules. Perhaps that’s why that US Navy admiral got canned. Anyway, I’m guessing the kinks will get ironed out over time, which may put more pressure on oil.

· I would have preferred a ceasefire extension with the Hormuz (partially) open. This current situation with the double blockade is dangerous for global economies.

· It seems that for the US, war is good for growth and inflation. We saw firm hiring data for the past few weeks and very strong nominal retail sales. When you are the world’s top oil producer and weapons manufacturer the economy as a whole is not so terrible. Oh and I forgot AI is on fire and we lead in that too.

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