Bond market yields are back at levels last seen before the Global Financial Crisis. Yields on 30-year treasury bonds went above 5%, and 10-year treasury bonds are approaching that threshold quickly. Bond yields in other developed economies are rising even more quickly.

On the face of it, there’s an obvious reason: the Iran War which cut off the supply of oil, gas, and other resources, pushing up inflation expectations. But there’s a much more fundamental driver of bond yields – a structural adjustment which replaces the post-GFC regime, and which ushers in a new era in financial markets.

Hope this is an interesting read!

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On September 30, 2025, a surprising non-event startled economists at the U.S. Federal Reserve. Under normal market conditions, corporations, financial companies, and investment funds stash excess cash away over quarter-ends to avoid reporting large cash holdings in their financial statements. This behavioral coordination is driven by regulatory restrictions, counterparty risks, or client investment guidelines. Typically, financial market players use short-term investment vehicles like the Fed’s Reverse Repo Program, in which they buy treasury bonds and sell them back overnight during quarterly reporting cycles. In the previous 4 years, the operations amounted to at least $400 billion every quarter end, including June 30th. However, on September 30, the spike in exposures was hardly noticeable. It was the clearest signal yet that excess liquidity from 15 years of Quantitative Easing had mostly drained from the financial system. Just 4 weeks later, after its October FOMC meeting, the Federal Reserve announced it would conclude operations to reduce the Fed’s balance sheet to avoid additional drawdowns.

But Fed officials soon realized Quantitative Tightening had gone too far already, and liquidity was getting tight in markets. So the Fed turned to a new emergency operation to increase money supply, this time buying treasury bills. On October 30^th, 2025, bills holdings on the Fed’s balance sheet were $195 billions. At the most recent reporting date, August 27^th, they had increased to $541 billions – a net gain of $346 billions, just to make sure financial markets remained liquid. The episode left little doubt: the era of excess money was over.

As a rule of thumb, governmental budget deficits should stay below 3% over the long run. Why 3%? Considering a target inflation rate of 2% and real growth of 1-2%, cumulative government debt won’t increase over time as a % of GDP.

However, since the GFC of 2008 U.S. governments have complied with this rule in just 2 years (2014 and 2015). Spending is out of control for a country which isn’t at war, at least not officially. Government debt is escalating. In September 2025, the total market value of treasury bonds exceeded $30 trillion for the first time. This summer, it went above $32 trillion.1

Consider how badly managed the U.S. economy is today. During the most recent technology boom, the dot-com bubble of the second half of the 1990s, tax revenues from tech companies were so large that the government actually ran surpluses, which allowed it to pay down some debt and vastly reduce the debt-to-GDP ratio. Today however, during the craziest investment boom ever, the government runs a 6% deficit.

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At the end of May I wrote about my expectations how the summer months were going to play out in oil markets. My core thesis was that buffers built in global oil supply chains provided some flexibility for the global economy to adjust, but they were more limited than headline numbers implied. At the same time, geographical dislocations, transportation limits, and product mismatches were progressively cutting away on flexibility.

The June ceasefire provided some breathing space and both crude and final product prices eased for a few days. But peace hopes collapsed, and the loss of flexibility starts showing in ever larger price spreads. The forces which I described in May are still in full swing.

I introduced the concept of flexibility in a posting on May 30. I believe it’s a powerful framework how to think of the implications of the Iran War. If you want to stay ahead of the curve and appreciate original ideas, please subscribe, share, and comment! This is really helpful to get broader traction. Many thanks!

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The International Energy Agency (IEA) released its August Oil Market Report a few days ago. The IEA is an intergovernmental organization which was founded in Paris in 1974 after the 1973-74 oil crisis. It is the world’s leading energy watchdog and coordinates global, collective responses to oil market disruptions.

The report pointed to the following key market metrics.

• Compared to the May report which I addressed in my previous posting, the 2026 decline in world oil demand got progressively worse, from -420,000 barrels/day to -1.6 million b/d - i.e. demand destruction jumped by a factor of 4.

• Global oil supply remained 6.3 million b/d below year-ago levels, with more than 8 million b/d still shut in the Gulf. Despite all mitigation efforts including increased production of non-OPEC members, rerouting Saudi oil through its East-West pipeline, and bypassing the SOH via the United Arab Emirates’ Fujairah terminal, supply disruption remains material.

• Even though refineries and transport routes rejigged, global refinery throughput remained 5 million b/d below previous year levels. The Middle East disruption is exacerbated by attacks on Russian refinery capacity.

Emergency release

Overall, the imbalance in flows due to the SOH blockade didn’t change materially. Marginal flows were added on the supply side, marginal consumption was cut on the demand side. The residual has been picked up by the drawdown from inventories.

By July 31^st, the most recent data point, the U.S. Strategic Petroleum Reserve (SPR) had dropped below 300 million barrels, the lowest level since 1983, representing a decline of another 100 million barrels in recent months. The drawdown follows an operation which the IEA coordinated in March to relief oil markets – a record 400-million-barrel release from global strategic reserves. That operation is almost exhausted with only 25% of the agreed reserve still available.

Can the operation be expanded?

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When I got started in finance, bond investors were happy with the investment return of government bonds. Equity markets were driven by rigorous balance sheet analysis and cash flow models. Single-name options were the exotic frontier, and their liquidity was sparse. Pricing tables, spread between columns of strike prices and rows of maturity dates, were empty deserts. I punched in asking prices for my clients based on simple Black-Scholes models hoping some counterparty would pick them up. Blip, the ask was gone. I hosted a daily radio (!) show about markets and posted some thought pieces about the successfulVolcker/ Greenspan approach to bring inflation down in the business press.

Those glory days are gone forever.

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Over the past few weeks, we’ve seen not one but two spectacular blowouts in financial markets, the collapse of the South Korean stock market index (KOSPI) and the forced liquidation of the largest AI-focused hedge fund on Wall Street. The parallels are intriguing. Both were the best-in class performers by far in 2025, investors in both were wiped out even though both are still best-in-class in 2026 after the meltdown. And finally, both the hedge fund and many KOSPI investors were leveraged almost identically. Excess isn’t new in today’s markets, but what should keep investors worried is a new feature – carelessness.

The Situational Awareness fund is/ was managed by Leopold Aschenbrenner, at first glance the poster boy of the Silicon Valley age – he graduated from Columbia University at 19, worked at OpenAI, and raised $225 million from the founders of Stripe at age 23 for his hedge fund. A second look is less favorable. Aschenbrenner was an “Effective Altruist”, joined Sam Bankman-Fried’s Future Work team in 2022 (yes SBF, crypto’s biggest fraud), and he left OpenAI because he was fired just a year in the firm.

In 2024, Aschenbrenner wrote a 165-page memorandum titled “Situational Awareness” which became something like required reading in Silicon Valley. He argued progress in AI development depended basically on available compute – and by implication, from the amount of compute under construction it was pretty straightforward to forecast the timeline for AI development.

Aschenbrenner built his hedge fund around that single thesis. What went in: hyperscalers, every company which ramped up datacenters. Out: semiconductors which he thought were overbought. Aschenbrenner bought put options for protection. Worst of the stack: software companies like Adobe which were going to be replaced by AI models. The fund shorted them (i.e. borrowed shares and sold them, expecting to buy back later at lower prices). Aschenbrenner was so confident in his strategy he borrowed additional funds from Wall Street prime brokers Goldman Sachs, J.P Morgan, and Bank of America to buy more shares.

The strategy worked spectacularly well until July 2026. The fund was up 439% since its launch in 2024. But the table turned on July 17, when Meta announced a new cloud computing service in direct competition to Aschenbrenner’s core holdings. Their shares tanked between 27% and 54%. On Monday, July 27^th, Aschenbrenner wrote a letter to investors asking for additional money to make use of what he considered a unique buying opportunity. But on Thursday, July 30^th, judgment day arrived. Overall losses reached an estimated 30% of fund assets. Here’s how that played out.

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AI model development is based on a unique industrial process. Each major node is controlled by a single company, essentially a chain of monopolies. The most advanced microchips are designed by Nvidia, which leveraged a unique computing architecture it cultivated over decades. Chips are built mostly by TSMC, a Taiwanese company which has mastered the operational challenges to crunch out chips at scale. The machines it uses were developed by ASML, a Dutch company which spent decades to gain control over light at a very specific spectrum.

In the global race to develop leading AI models, western companies and politicians thought that tight process controls offered an easy way to keep out competitors. Don’t export Nvidia chips to them, and they can’t run compute. Don’t send ASML machines to them, and they can’t build their own GPUs. The world’s most complicated export control system was designed around a single commodity, AI compute, by the U.S. and the EU.

However, it seems China poured cold water over their ambitions. China unveiled a prototype EUV machine, years ahead of schedule.

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EUV (extreme ultraviolet) lithography machines are the most complex devices mankind has developed. They produce microchip wirings just a few atoms wide. The technological challenges are formidable.

• To print wiring onto silicon wafers, you need light of a wavelength of precisely 13.5 nanometers, which is impossible to produce directly. Dutch company ASML has developed a sophisticated workaround to produce that light. ASML machines release tiniest tin droplets (whose diameter is measured in micrometers) into a vacuum where a powerful laser beam hits them in a double-tap process. The first hit flattens them, like a waterdrop hitting a glass bottom. The second hit heats up the tin into a plasma 200,000°C hot. Tin then releases 13.5nm light as it cools down. ASML developed this exceedingly complex process it in cooperation with German laser manufacturer Trumpf, which is the only company that can provide a CO2 laser with exact specifications. That’s challenge number one.

  

  (Source: ASML)

• The light then needs to be collected and focused on silicon wafers. But any particle in the way of EUV light absorbs most of it, even glass lenses. ASML therefore uses an array of special mirrors which are coated in layers of reflective material just a few atoms thick and which are ultra-flat. Even then, the mirrors each reflect at best 70% of EUV light – which, because of the power law, becomes a problem in an array of 10 or more sequenced mirrors. There’s only one company in the world which has the technology to produce them – Carl Zeiss of Germany. Just to drive home the level of required precision: if the mirrors were scaled up to a plane the size of Germany, the tallest elevation on it would be less than 1 millimeter high. That’s a second challenge.

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Twenty years ago, the GFC started unfolding as “teaser rates”, strongly discounted interest rates on mortgage loans supposed to lure naïve investors into the housing market, reset to market rates, kicking off a wave of loan defaults. The Federal Reserve eventually bailed out the banking system; however, almost 2 decades of cure have started debasing the dollar system. Alternative payment systems are gaining traction in competition to dollar-based trade, and global central banks are selling U.S. treasury bonds.

But there’s something global partners and enemies consistently underestimate: America’s potential to re-invent itself. Or to put it more dramatically like Chris Cornell,

“If you think you’ve won
you never saw me change the game
that we’ve all been playing.”

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On July 9^th, 2026, the Federal Reserve announced the leadership and objectives of five task forces, following the vision of its new Chair, Kevin Warsh, to transform the operation of monetary policy in the world’s largest economy.

1. Task force one/ Communications: review how the Fed conveys policy deliberations and decisions.

2. Task force two/ Balance Sheet Policy: examine the costs, benefits, and institutional implications of the Fed’s current balance sheet regime

3. Task force three/ Data: improve the quality and timeliness of real economic signals

4. Task force four/ Productivity and Jobs: assess the economic impact of new technologies, in particular artificial intelligence

5. Task force five/ Inflation: revisit how the Fed understands and responds to the drivers of inflation

The task forces are each headed by a trio of leaders, including academics, business leaders, and former central bankers – heavy hitters in their respective fields of expertise. The AI workstream is co-led by Mark Andreessen, who, largely forgotten, co-developed Mosaic, the world’s first web browser, and later developed Netscape, the leading browser of its time. Later, Andreessen launched Andreessen Horowitz, one of Silicon Valley’s leading VC firms. The inflation workstream is co-led by Greg Mankiw, a leading Harvard economist; Thomas Sargent, who holds the Nobel Memorial Prize in Economic Sciences for his work on unexpected shocks to the economy, and William White, a former economic adviser for the BIS/ Bank of International Settlements.

In sum, the task forces look into every corner of monetary policy, from jobs and inflation (its core mandates), its monetary paradigm (ample reserves), and cooperation with the financial community.

I covered the Balance Sheet work stream in my posting on June 20, where I pointed out there’s a key hurdle to any changes to the Fed’s balance sheet: system-wide banking reserves which in aggregate remain stubbornly anchored at around $3 trillion.

So, the challenge for workstream two will be to evaluate if the current approach to central banking is worth it, and how to get out if not.

Horses and lemmings

In parallel to inflating its balance sheet, the Federal Reserve also became something like a horse whisperer for financial markets – feeding ever more pieces of economic intel to bankers with the intention to nudge interest rates their way and exercise some control over the yield curve, policy actions which collectively became known as Forward Guidance. A well-known part of it is the dot plot, a scatter diagram in which FOMC members chart their expectations for federal fund rates at future dates.

Over the past two decades, those policies have created a serious coordination problem – widely unrecognized and misunderstood. Here’s how it works.

(Now that’s a horse whisperer!)

Wall Street analysts and a fair number of economists loved forward guidance – after all, the more information is available, the better is decision making?

Unfortunately, it’s not that straightforward. Financial markets’ reactions to forward guidance have created feedback loops with unintended consequences. When the Federal Reserve communicates economic scenarios and interest rate expectations, it basically communicates desired outcomes – and markets might take advantage of it. When the Fed telegraphs it desire to bring bond yields down, market participants know it will step in if rates rise. This invites players like hedge funds to set up huge, leveraged positions because their downside risk is limited. Across the market, Fed communication coordinates behavior, and most participants position in the same way.

There’s a great example for that coordination – the famous taper tantrum in 2013. On May 22, 2013, Fed Chair Ben Bernanke addressed balance sheet expansion in congressional testimony before the Joint Economic Committee. QE3 was running high, but Bernanke said the Fed might reduce asset purchases “in the next few meetings”. Bond markets sold off immediately, sending the yield on benchmark ten-year treasury notes from about 1.6% to over 2% within a month. The Fed created exactly the kind of volatility it had intended to eradicate. Essentially, forward guidance acts as a GPS that sometimes routes you into traffic jams because everyone else is following the same map.

More recently, in 2021 the Fed kept signaling it would keep rates near zero despite strong indications inflation was rising (the pandemic QE was the largest ever; liquidity flushed markets right at the time when supply chains disruptions drove up prices). Markets were herded to believe QE would continue, which eventually resulted in a much sharper correction when the Fed raised rates in 2022.

But forward guidance not only coordinates behavior, it might also render policy actions ineffective. Key reason: Financial markets preposition to take advantage. Consider the Football World Cup which just played out in Canada, the U.S., and Mexico. Would any team coach have broadcast his tactics for the next game? His opponents would of course adjust their own playing tactics, making the coach’s plan ineffective. Here’s how that translates into financial markets. Consider a hypothetical scenario in which the Fed communicates it will definitely cut the federal funds rate in a future FOMC meeting. Banks will start immediately bidding the fed funds rate down in a riskless arbitrage trade. The Fed observes that financial conditions today start easing and the fed funds rate drops below the target range. In response, the Fed will tighten financial conditions. Effectively, because markets pre-positioned, they sterilized Fed policy.

Back to square one

In the greater scheme of things, there’s a final irony. As I’ve noted before, the key reason for ample reserves was the Fed’s worry about liquidity. Central bankers wanted to make sure bottlenecks like during the LTCM crisis, the dotcom bust, and the GFC would never again repeat. But ample reserves drove down bond yields which in turn sparked the crazy “search for yield”, the phenomenon in the later 2010s when investors bought anything that provided a little extra yield. Where did they end up? To a large degree in private credit, which was a marginal asset class in the 2000s (total volumes around $200-300 billion) but exploded to $1.5 trillion in the late 2010s and went past $2 trillion after the ZIRP period (zero interest rates policy). So, in an effort to provide extra liquidity, the Federal Reserve basically pushed investors into one of the most illiquid asset classes which has created a whole new set of imbalances: as interest rates increased, rolling over debt from the ZIRP times became much harder; investors find it increasingly more difficult to exit the asset class; instead of return of capital, they face extensions and complex workout situations - an emerging dynamic which I described two years ago.

How do Wall Street banks address this problem? They are pitching a new idea to insurance companies. The banks are setting up asset-backed securities: bonds made up of baskets of private credit deals, sliced and diced to provide risk diversification, for which insurance companies are asked to provide credit insurance to enhance ratings. Sounds familiar? This was exactly the basic structure of deals supported by AIG – the first domino to fall in the GFC. After twenty years of breathless Federal Reserve interventions, we’re moving back to square one.

Central banking policies have driven many of the imbalances in financial systems in the past two decades, benefitting a few (in the form of ever-increasing concentrations of wealth) at the expense of many (in the form of goods inflation and unaffordable housing). As things stand, Kevin Warsh plans to address them in a bottom-up transition program for the Federal Reserve. I have little doubt what the outcomes will be for task forces one and two. Regarding Forward Guidance (TF1/ Communication), I’ll point out that Warsh already declined to add his votes on the dot plot, a pretty unambiguous signal. My guess is the chart, long a place of pilgrimage for financial analysts, will be phased out later this year – together with other material. Regarding Balance Sheet Policy (TF2), the real challenge won’t be the What, but the How - how to sort out the mess left by his predecessors.

The near-term outcome especially for bond markets? Less certainty, but also less herding behavior and crowding around preferred trades.

With his turnaround program Warsh addresses one of the two key weaknesses of the U.S. based financial system (the other one being excessive government spending). The Fed is also the only central bank which investigates specifically, and from top leadership, the potential impact from the next industrial revolution, AI.

Will Warsh succeed? An institutional conflict is on the horizon. If the AI trade and stock markets crash, Trump, all of Wall Street, and most politicians will press for a Fed-backed bail out and new QEs.

Let me know what you think,

All the best,

John

20 years ago, Wall Street bankers thought they had found the ultimate cheat code when they recycled subprime, defaulting mortgage loans into AAA-rated bonds. Fast forward to June 2026, and the mechanics of financial market exuberance have migrated from credit to equity markets. Elon Musk floated SpaceX in a deal which humiliated investment bankers – he dictated the terms, slashed underwriting fees by 90%, and forced bankers into awkward subscriptions for his xAI chatbot. But he also twisted the arms of another group of financial market intermediaries, the consequences of which might well come back to haunt markets for years.

A lot of research and thought went into this piece - hope it is helpful for your own considerations! If so, please drop me a like, a comment, or subscribe. I appreciate your interest!

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SpaceX went public on June 12 in the largest equity offering in history. Elon Musk told deal leader Goldman Sachs to set a price of $135 for 555.6 million shares, resulting in proceeds of $75 billion – more than twice the amount of the world’s second-largest IPO, Saudi Aramco. The stock started trading at $150, which translated into a valuation of almost $2 trillion and a pop of $200 billion. On June 16, SpaceX bought startup company Anysphere, which developed a popular AI coding agent, for $60 billion in an all-stock transaction.

But investors couldn’t get enough SpaceX exposure. Just days after the equity offering, Musk placed a bond offering worth another $25 billion against demand of $89 billion. The overall cash haul in just weeks was at least $100 billion – an amount which previously only the U.S. Treasury has raised, the world’s largest issuer.

On June 17, 2002, President George W. Bush visited the city of Atlanta, Georgia, to announce the launch a new national economic policy. He said that homeownership was a cornerstone of America’s healthy, vibrant communities, and benefited individual families by helping them build stability and long-term financial security. Home ownership became a central pillar of George Bush´s presidency. He launched several programs to support home ownership, and challenged the real estate and mortgage finance industries to develop new mortgage products. Housing markets played along. Between 2004 and 2007, $2 trillion of mortgage bonds were issued annually, about four times more than the US government issued in federal debt. Mortgages now were the biggest profit engine on Wall Street.

Mexican strawberry pickers bought $750,000 SoCal homes on loans. Jamaican housekeepers owned 5 fully mortgaged apartments in New York City. How was that even possible? Who signed off on those loans?

The business model of a mortgage bank used to be simple. Raise money from depositors, other banks, and investors, and hand out loans. The better the loans performed, the better the economic return for the bank. The economic well-being of a bank depended on the quality of its screening and approval process for mortgages. Banks were the gatekeepers to credit in the old world.

But then, they found a new, great way to by-pass default risks. They passed them on to Wall Street basically overnight, where they got repackaged into diversified mortgage bonds. You know the end of the story.

But banks didn’t just shove loans around markets. They also gave up their central economic function in credit allocation – gatekeeping. Because risks no longer remained on their balance sheets, there was little incentive to select quality credits. In fact it was the other way around. Banks made more money the more loans they originated. Because of the securitization process and the huge appetite it created from investors, financial markets lost discipline.

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Central banking might not sound like the most captivating topic in the world. But the policies implemented after the Global Financial Crisis explain much of the deeply worrying state of western financial markets – from absurd valuations of stock exchange indices and IPOs to unaffordable housing and inflation rates which make everyday shopping a distressing experience. High time for Kevin Warsh to address a persistent problem.

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The U.S. Federal Reserve just finished its first FOMC meeting (Federal Open Market Committee, the body which decides on policy interest rates) under the Fed’s new chairman Kevin Warsh. The federal funds rate was left unchanged in a target corridor of 3.5%-3.75%, as widely expected. Warsh will change a few other items – fewer comments on the economic outlook, and he decided to scrap “forward guidance”, i.e. comments on the likely future course of monetary policy. All of that is just the daily hustle of central banking, an endless iteration of tactical decisions. Nothing that leaves a heritage as a great economist.

But Warsh has something else in mind. What he really wants: unravel the biggest experiment in monetary economics in modern history, the policy which created many of today’s imbalances in the financial system and inflation rates which have impoverished large parts of the populations in all countries which followed this policy.

If you’ve followed me for a while, you know I’m very critical of the approach western central banks have taken after the Global Financial Crisis – in fact it’s my core thesis why all those imbalances in our economic system have developed.

Here’s a quick summary just as a reminder. After the GFC, the Federal Reserve realized the financial system had gone through three shock events in just ten years, all of which resulted in liquidity crises in the banking system. In each case, market liquidity dried out, and during the GFC, banks stopped lending to other banks, the worst-case scenario for financial economies. The obvious solution? Provide more liquidity than banks would ever need. The U.S. Federal Reserve therefore implemented a new approach for monetary policy called “ample reserves”. It bought Treasury bonds and mortgage-backed securities which it paid with fresh central bank money in several rounds of quantitative easing. In mid-2008, the Fed’s bond portfolio amounted to about $800 billion, built over almost 100 years to increase money supply gradually. At the end of 2021, just thirteen years later, the portfolio had expanded to almost $9 trillion.

The new policy had a nice and widely underappreciated feature. The Federal Reserve received income from the bonds which it is obliged to pass on to the U.S. Treasury. A very convenient setup, because in the end the Treasury was paying interest on its bonds to itself. Over the years, remittances to the Treasury summed up to over 1 trillion dollars.

But the policy also led to an astronomical increase in money supply, warped asset prices and yield curves, and inflation in consumer goods.

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On May 13, the International Energy Agency (IEA) published its Oil Market Report – May 2026. The findings were alarming. As the report pointed out, crude oil supply from the Gulf countries had declined by 14.4 million barrels a day (mb/d). Other countries increased output by around 1.6mb/d, resulting in an overall loss of 12.8mb/d. The market went from a surplus up until February to a significant deficit in just two months.

However - existing oil stockpiles are huge, billions of barrels even in conservative estimates. Certainly enough to plug the gap for at least a year.

Why, therefore, did Fatih Birol, head of the International Energy Agency, warn about energy shortages coming as early as June?

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The Iran situation keeps getting more confusing. There’s little doubt that U.S. President Donald Trump hasn’t got a game plan how to end the war he started three months ago. Military action hasn’t done anything to achieve his goals. Project Freedom, touted as the largest naval operation of all time, fizzled out in under 36 hours without any meaningful result. His most recent appeal to Gulf nations and Southwestern Asian countries to join the Abraham Accords didn’t resonate in the region. Global leaders increasingly consider his rapid-fire Truth Social postings, which oscillate between “civilizational destruction” and imaginary peace deals within hours, no more than random noise.

All the while, the Strait of Hormuz stayed closed. Global crude supply has declined by 12%, and oil markets went from oversupply as recently as in February to severe deficiency. Apparently however, even oil prices have decoupled from events on the ground. Oil futures prices are the lowest since early March, which implies an end to the war in days – while key positions under negotiations for a peace settlement, like uranium enrichment, are diametrically opposed.

Oil prices and available quantities are therefore a function of two parameters:

1. Expected timeline for opening the Strait of Hormuz

2. Existing oil repositories which have plugged the gap to demand so far

Billions of barrels of oil are held in strategic and commercial repositories, which should last at least another year even at large drawdown rates (observed drawdowns amounted to 4 million barrels per day in April, but real rates are probably much higher as a mathematical necessity).

And in fact, the global crude supply chain has demonstrated remarkable flexibility when compensating the loss of Gulf country output. Residual stockpiles are huge - “billions of barrels”. But there’s a catch which is beginning to hurt. As songwriter Alanis Morissette put it in her most famous song (“Ironic”),

“It’s like ten thousand spoons when all you need is a knife”.

Storage conundrum

Crude oil is stored in transit (tankers, pipelines), at resellers, refineries, and at strategic repositories (the IEA requires net importers of oil to keep at least 90 days inventories). Here’s a back-of-the envelope count of global reserves.

Commercial inventories, including mainly crude terminals, reseller storage, and industrial inventories. They are the backbone for buffer reserves. According to the IEA, drawdowns in April alone amounted to 170 million barrels. The total stock in OECD countries is around 2.5 billion barrels, visible stock in non-OECD countries around 1.5 billions. In total 4 billions, with an error range of 3.5 – 4.5 billions. But unfortunately, they can’t be viewed as a global fungible pool. Much of the total is locked by operational minimum storage levels to keep pipes full and system pressures intact; stranded geographically as total transport capacity is fixed in the short term; mismatched for refinery needs. Of the notional volume, probably no more than about 1.5 billion barrels are fungible.

Strategic petroleum reserves (SPRs): Global SPRs are estimated at 1.5 – 2 billion barrels. 400 million barrels have been authorized for release, of which more than 160 million have been consumed at a run rate of 2.5 million a day, according to Fatih Birol, head of the IEA. But release requires political approval processes. Politicians have approved the initial batch in the expectation to bridge a short-term disruption. Additional release may be much more difficult to obtain.

Oil in transit: At any point in time, about 1 billion barrels are being shipped around the world on tankers. However, that’s not spare capacity but committed cargo; essentially part of the supply chain. Maybe just around 100 million barrels can be redirected – not enough to quality as meaningful buffer

Tanker traffic actually makes the supply problem worse. Total tanker capacity is fixed in the short term, but tankers have to take much longer routes to avoid chokepoints, or to supply geographically much more distant markets. Instead of sourcing from the Middle East, European countries are buying from Nigeria and Brazil. It’s much worse for Southern Asian countries. As travel time increases, transport capacity goes down - a widely underappreciated system constraint.

Pipelines and refinery inventories: Because of their enormous capital intensity, refineries are finetuned for maximum efficiency. Throughput is just 12-24 hours. Inventories average 25 days – essentially an operational buffer, not a strategic reserve.

Pipelines don’t work if they are not full. If they aren’t continually refilled at the far end, you can’t pull anything out at the near end. In total, reserves at refineries and in pipelines are basically work in progress and don’t serve as buffer systems.

Uneven regional split: Regionally, inventories are unevenly distributed.

Large inventory holders include

• US Gulf Coast

• China

• Rotterdam/ARA

• Japan

• Korea

• Singapore

Vulnerable importers

• South Asia

• Southeast Asia

• East Africa

• smaller European states

• island economies

Mind the gap

The key issue about the loss of Gulf countries output isn’t just the notional amount. Gulf countries supplied a very specific quality of oil – unfortunately the central feedstock for global transport.

(Regular readers will remember this chart from a discussion about Venezuela. Source: THE ECONOLOG)

So, the global oil economy isn’t just rejuggling and rerouting, it also has to compensate summarily for the loss of a central feedstock. You might remember what I pointed out previously - oil refineries do not simply “make fuel.” They are highly optimized chemical systems designed around specific crude slates. Different crude oils contain different proportions of hydrocarbons, sulfur, metals, and density characteristics, which strongly influence the refinery’s final product mix — gasoline, diesel, jet fuel, LPG, asphalt, petrochemical feedstocks, and residual fuel oil. Each stage of the process – from initial distillation to separate main components, processing, etc – requires separate machinery. To maximize efficiency, the overall layout is calibrated to a standard input (for example, medium-grade crude from a specific region) to produce a main output (e.g., diesel), accompanied by ancillary products.

While refiners can adjust operations within limits, the output ratios are not infinitely flexible. Substituting a very different crude grade often reduces efficiency, lowers yields of desired products, and increases processing costs. Each of the process steps which were previously aligned for seamless operations can now become a bottleneck – because the new feedstock contains more sulphur, or different metals and crude grades. The process is suddenly constrained by the lowest common denominator, and efficiency declines rapidly.

As it turns out, the “inventory totals” framing is actually misleading in oil crises. Inventories aren’t one giant fungible pool. A single pool would require perfect mobility, substitutability, and instant availability. None of those factors is present. Reserves are fragmented geographically, by quality, ownership, infrastructure, regulation, refining compatibility, and transportation constraints.

Rather, the oil system should be fundamentally viewed as a processing engine, not a storage system. Reserves at different level of the system were set up not for storage, but to keep the system running efficiently with controlled buffers – with the exception of SPRs which the IEA mandated for net importers of crude (in fact the U.S. SPR was set up in response to the 1973 oil crisis, when the U.S. was a large importer).

Large mismatches are building in the overall oil supply chain – at refineries (the IEA reports that throughput is declining), geographically, and in product space. Modern oil markets are stable not because inventories are large, but because inventories are flexible. Once flexibility disappears, even seemingly large reserves become operationally irrelevant.

In the end, this is what the IEA is worried about - by summer, the easy substitutions will have been exhausted. The next layer of adjustments will be more time-consuming, more difficult, and much more expensive. Refineries can adjust operations to some degree, but eventually substitutions in feedstock will require massive financial investments. The real problem isn’t a hard limit on supply, but the adjustment processes to rebalance all those mismatches.

From historical experience, they include:

• recessions,

• demand collapse,

• rationing,

• price spikes.

Those adjustments will hit unevenly. Most oil traders and analysts sit in London and New York, geographies where reserves are still abundant and economies have financial and fiscal buffers. But the output gap is already hitting hard in other parts of the world through real fuel shortages and second-order effects like rapidly rising transport costs and inflation, including South/Southwest Asia (Pakistan, India), and countries across the African continent.

The global oil economy is currently operating in makeshift mode, applying band aid patches here and there, “and call me tomorrow if it doesn’t get better”. But the patient needs open heart surgery.

Let me know what you think,

All the best,

John

On September 16, 2025, I posted my piece “Peak Trump”. I pointed out that Donald Trump’s whirlwind of initiatives was running out of steam, and Trump was losing escalation dominance in critical areas of global influence – while China was emancipating and stopped playing along. In that piece, I also suggested that Trump would launch a major initiative in the Middle East to reestablish authority1.

And here we are. Instead of turning around the momentum of his presidency, the Iran War accelerated the secular forces working against the U.S. They way Trump was received when he arrived in China – just ceremonial figures and Chinese schoolchildren waving Chinese flags showed up at the airport – foreshadows the repositioning of the U.S. in the eyes of global allies and adversaries.

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Thucydides was an Athenian general and the world’s first political scientist. He lived in the 5^th century BC and was the first writer to chronicle contemporary wars without references to the intervention of gods, but from an impartial cause-and-effect viewpoint. Famous texts include the Melian Dialogues, an episode in the Peloponnesian War in which dominant power Athens bullied much smaller island Melos to join its military alliance “or face total destruction” (rings a bell?) – a story which political commentators have invoked in recent months to reflect on current events.

Thucydides’ most famous contribution was a generalized observation about the Peloponnesian War – “it was the rise of Athens and the fear that this instilled in Sparta that made war inevitable”.

In 2011, American political scientist Graham Allison coined the phrase Thucydides Trap for this dynamic – in a confined space, the rise of a competitor will necessarily lead to war with the incumbent power.

When Chinese President Xi Jinping met U.S. President Donald Trump on Thursday, May 14, he used the term in his opening remarks. “Whether China and the United States can transcend the so-called Thucydides Trap and create a new normalization of relations between major powers; whether we can join hands to address global challenges and inject greater stability into the world; whether we can advance the well-being of the peoples of our two countries and the future destiny of humanity, and jointly create a better futures for bilateral relations,” Xi said.

The disbalance of global oil markets deepened again in April. According to latest IEA numbers, released on May 13, output from Gulf countries was 14.4 million barrels/ day (mb/d) below pre-war levels. Higher production from other regions, notably the Atlantic Basin, compensated some of it but total losses since February amount to 12.8 mb/d. Even though demand declined as well (a phenomenon called demand destruction), the global output gap is now around 9mb/d vs. a surplus up until February. Reserves in transit, local tanks, at refineries, and at strategic repositories are draining “at a record pace”, as the IEA noted. Chinese seaborne imports fell by 3.6 mb/d, according to logistics analytics firm Kpler.2

The U.S. government has long recognized there was a mutual dependency between Iran and China. The Chinese economy is critically dependent on Iranian oil, and in turn Iran received foreign funding from China for its own economy, setting up a mutual vulnerability. The Trump administration attacked in this area of weakness when it imposed sanctions on five Chinese “teapot” refineries, independent processors whose viability depended on imports via shadow fleets at discount prices, already in March 2025. According to U.S. laws, American sanctions extend not only to U.S. companies, but also to “U.S. persons” and the use of the dollar for transactions. Therefore, even though this is American law, sanctions have global reach and effectively cut sanctioned companies off from financial markets (including access to U.S. banks, the SWIFT system, dollar clearing, and Western capital). On April 26, out of frustration how the Iran War went, Trump turned up the heat. The American Office of Foreign Assets Control (OFAC, the Treasury department which imposes and administrates sanctions) designated Hengli Petrochemicals as well, China’s second-largest refinery and a major buyer of Iranian crude – a clear message and a major escalation.

This time however, China decided it would not comply. On May 2, China’s Ministry of Commerce invoked China’s Blocking Order in response – laws which were introduced in 2021, and which were intended to counter the extraterritorial reach of foreign sanctions.

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American policymakers have spent the last 50 years creating a fabulous economic flywheel. It has created huge benefits for the U.S. economy, and its imbalances were picked up by global markets.

Donald Trump has decided to pull out, unwittingly, a key pillar of the flywheel, and the effects are already showing. Economic statistics point to a worrisome reversal of capital flows. At the same time, the original basis of it - global oil trade dominated by OPEC - is crumbling. The convergence of those two developments triggered drastic action of a Middle East country this week.

It’s another episode inside the broad trend of fragmentation of trade, markets, and zones of interest – read it first on The Econolog!

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On June 9th, 1974, U.S. Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdulaziz Al Saud concluded an inconspicuous agreement between the USA and Saudi Arabia, setting up the “Joint Commission on Economic Cooperation”.

The language in the contract was vague. The commission was supposed to foster closer political ties between the two countries, assist Saudi industrialization, and facilitate the flow of American goods, services, and technology to Saudi Arabia.

The real targets of the partnership were not spelled out: Saudi Arabia was expected to produce enough oil to stabilize world demand “at stable, and hopefully lower prices”; in turn, the U.S. would provide Saudi Arabia with suitable investment opportunities for oil sales proceeds1.

At the time, world oil trade was in chaos. After decades of stable prices of just $3 per barrel of oil, prices were spiraling out of control. Major Middle East oil producers had long been dissatisfied with their share in oil revenues, because western oil companies which produced, transported, and processed the Middle East’s resources took home the lion’s share of profits. Negotiations at the OPEC meeting in October 1973 in Vienna, Austria, didn’t go anywhere. When U.S. President Richard Nixon announced a large aid package for Israel, which was faltering in the Yom Kippur/ October War, it was the final straw for Saudi Arabia, OPEC’s largest producer. It cut oil shipments to the U.S. Other countries in the region followed. The embargo exposed a huge vulnerability of the U.S., by far the world’s largest economy and the biggest consumer of oil. Domestic production peaked in 1970 at just above 10 million barrels a day. By June 1974, it had dropped already well below 9 million.

Kissinger’s visit in 1974 set up a rough outline; a Wall Street banker put flesh to the bones. In July 1974, Treasury Secretary William Simon went on a roadshow in the Middle East with a four-day stop in Jeddah, a coastal city of Saudi Arabia. Simon had previously been a senior partner and head of the treasury trading desk at Salomon Brothers, a Wall Street investment bank which was quickly becoming the leading firm of that time specifically because of its bond trading capabilities.

Simon had a bond deal for the Saudis: now that oil was trading at more than three times its historic price, and the U.S. was picking up millions of barrels a day, surely the Saudis were looking for a place to invest their hard-earned dollars? Skilled salesperson that he was, he persuaded Saudi Arabia to invest much of its oil money back into U.S. treasury bonds, in addition to its vast purchases of U.S. military equipment. The petrodollar system was born.

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Guyana may be the smallest country in South America but it’s the fastest growing one. In a posting last summer, I pointed out how oil discoveries off Guyana’s coast revolutionized its economy, which has expanded by a factor of 5 since 2020 (I’ll add I was the first writer on Substack to raise Guyana – stay ahead and subscribe to The Econolog!).

Where there’s a lot of light, there’s also a lot of shadow – and dark players are already lining up. Will Guyana be able to defend its success model?

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In August 2006, David Packouz and Efraim Diveroli presented their pitch for one of the U.S. Army’s largest weapons procurement contracts ever. The U.S. government was getting desperate for better outcomes in the Afghanistan War and rearmed the Afghan military for its fight against the Taliban. The Pentagon issued a large tender for munitions, rifles, rocket launchers, mortars, and other gear, with a total deal volume of around $300 million. When they won the tender, Packouz was 24. Diveroli had just turned 21.

They had found the proverbial glitch in the system. Traditional military spending went largely to big defense firms, which were well connected to government insiders, without competitive bidding, due oversight or controls, potentially wasting billions of dollars in excessive bills. In response, the Bush government set up new policies which forced the Pentagon to set aside a minimum budget for smaller, independent companies to create more competition for government projects.

Diveroli and Packouz poured over thousands of tenders to identify loopholes – contracts for which large weapons manufacturers could not bid because they were not economic, or not even entirely legal. Already in 2005, Diveroli sold Russian-manufactured AK rifles worth $15 million to Iraqi security forces which the U.S. government equipped with Soviet-style weapons. Where did 19-year-old Diveroli get Russian rifles from? Nobody bothered to look. In the end, that was the whole purpose of the business model. Diveroli and Packouz were the middlemen who greased the flow of weapons in grey markets – weapons which were euphemistically called “non-standard” in a NATO context, for markets which the US government could not reach officially.

The Afghanistan deal, as it became known, was all of that – too illegal, but also too large to pass. It required several hundred million rounds of AK-47 munitions, but the main producer was sanctioned (China). Diveroli and Packouz got in touch with Swiss arms trader Heinrich Thomet, who had contacts with the defense ministry of Albania, a small Balkan country previously behind the Iron Curtain. It was a mutually beneficial relationship – Diveroli and Packouz needed Thomet’s network, and Thomet needed them to do business with the U.S. government (he was on the State Department’s Watch List). Albania still housed huge stockpiles of Soviet munitions, bought as early as in the 1960s and largely of Chinese origin. Packouz and Diveroli had them repackaged to conceal the origin. But when deliveries arrived in Afghanistan, much of it was rotten and unusable. The deal blew up in their faces. In the aftermath, Diveroli was sentenced to four years in prison for conspiracy to defraud the United States, but Packouz got away with seven months of house arrest.

(David Packouz, left, Efraim Diveroli, right)

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Are we in the end game of the Iran war? One day it’s civilizational erasure, the next day peace negotiations. But negotiations for what? Donald Trump started the war to engineer regime change (?) and failed. American oil executives are developing a taste for something quite different. But as Washington continues talking about crafting “its own plan”, it appears to be operating in a state of cognitive denial. The fundamental truth is: in this negotiation, Iran holds most of the cards. Who controls the Strait of Hormuz controls the outcome of the war.

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After a 5-week bombing campaign across Iran, Israel, and almost every country in between in the Gulf Region, Iran and the U.S. agreed on a cease-fire for two weeks to work on a lasting peace agreement. Iran sent a ten-point proposal to Donald Trump which Trump called “a workable basis on which to negotiate”. Iranian officials published the following items:

1. A binding pledge the US will not strike again

2. The Strait remains under Iran’s authority

3. Formal recognition of Iran’s right to enrich uranium

4. The end of direct US economic restrictions (including banking, oil exports, financial systems)

5. No more penalties on third countries doing business with Iran (i.e. “secondary sanctions”)

6. Termination of past UN Security Council resolutions (which formed the legal basis for global pressure)

7. Relief of International Atomic Energy Agency monitoring activities

8. Financial compensation for reconstruction

9. Pullback of American troops from Middle East bases

10. The Truce covers Iranian allies and halts hostilities against groups like Hezbollah

U.S. government officials quickly pushed back and said negotiations were about a different 10-point plan.

Donald Trump sent the U.S. into the war without any specific strategic deliverables, but a vague idea of regime change. The attack on February 28, called a decapitation strike, targeted the Ayatollah. His assassination was supposed to lead to a collapse of the theocratic state, the Islamic Republic, basically over the weekend. Somehow, the Iranian people were going to institute a new government which would make lots of deals with the U.S. and hand over its stockpiles of enriched uranium.

That plan, as basic and naïve as it was, failed. American interests are now shifting to two other targets: Iran’s oil, and control over the Strait of Hormuz.

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The line between a casino bet and a calculated trade has never been thinner. Not that long ago, “betting on the news” was an amateur game. But in recent weeks, millions of dollars were made in hours. Prediction platforms have made rapid advances and now operate with the speed, liquidity, and information-edge incentives of commodities pits – and will soon have a large impact on them. Time to take a closer look at an emerging risk!

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In 1983, Wall Street satire Trading Places was released to become one of the greatest comedy films and Christmas films ever. It launched the career of Eddie Murphy into superstardom.

In the movie, the cynical Randolph and Mortimer Duke run Duke & Duke Commodities, a large brokerage firm. They make a $1 dollar bet on their star trader, Louis Winthorpe III – will his killer instinct which he demonstrates daily at trading desks also enable him to survive when he’s stranded broke in the streets of Philadelphia? And can a jobless street hustler, given the right opportunity, become the next star banker? In a sinister experiment, the Duke Brothers frame Winthorpe for theft and drug possession and strip him of his job, his home, his fiancé, and his reputation. In his place, they elevate Billy Ray Valentina (Eddie Murphy), a street hustler, into a gentleman banker position at their firm.

But Valentine and Winthorpe team up. They realize the Dukes attempt to manipulate financial markets, stealing a governmental crop report which provides valuable information about the Florida orange harvest.

Valentine and Winthorpe replace the authentic crop report with a forgery. The Dukes are led to believe the orange harvest will be bad, and they start buying large quantities of futures contracts in the expectation that prices will rise. When the real report is released by the government, prices fall rapidly. The Dukes go bankrupt, and Valentine and Winthorpe, who bet against them, become rich. It turns out they made a $1 bet as well – “Louis bet me that we couldn’t both get rich and put you in the poor house at the same time. I won!”

The crazy thing about the movie – trading on confidential government information wasn’t even illegal at the time.

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This is the concluding part of a 3-piece series on Iran. I still stick with the scenarios which I laid out in early March, just after the war started – events have confirmed the trajectory, and I’ll provide some more details. We may be looking at the largest geopolitical transition since the collapse of the Soviet Union, and I think this moment deserves attention. Too much has been lost.

If you think I’m overly pessimistic, I’ll leave you with a quote of a famous comedian. “An optimist is someone who doesn’t take things as tragically as they are.”

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In April 1600, William Adams, an English navigator, was stranded near Nagasaki, Japan. He was one of the few survivors on board of the Liefde which had left Rotterdam two years earlier, part of a small fleet of five ships sailing to trade with South America.

The mission failed. The ships got caught in a storm, and the convoy split up. Most men on board died of starvation, some were killed by local populations of the remote islands they reached.

When Adams arrived in Japan, more dead than alive, he was brought before Shōgun Tokugawa Ieyasu, the military deputy of the Japanese Emperor. Tokugawa realized Adams was a valuable asset and knowledgeable about emerging power plays. European kingdoms were splitting up the world into spheres of influence, in the first truly global race for domination, led at the time by the Spanish and Portuguese crowns. Jesuit missionaries were already building influence in Japan. Adams’s real task had been to find trade routes to Japan and other Far East countries, a secret passage known only to Spanish and Portuguese sailors. As a practical consideration, the Liefde carried 19 cannons, and Adams trained Tokugawa’s soldiers how to use them.

But Tokugawa also realized Adams acquired significant intelligence on Japan, know-how that he didn’t want to spread to Western powers whose superior military technology would enable them to overrun Japan. He forbade Adams to leave for ten years. When he eventually got approval, he decided to stay anyway. Adams recorded his memories in notebooks which were brought to Europe many years later and eventually formed the basis for James Clavell’s novel Shōgun.

The novel contains an episode whose cultural significance is often overlooked. The British sailor prepares a proper English-style meal from a pheasant he received as a gift. He hangs the dead bird outside his house to dry-age the meat, a traditional European practice. The Japanese villagers, steeped in cleanliness and propriety, find the stench and sight of the rotting pheasant intolerable. But Blackthorne (the fictionalized Adams) is insistent – the bird stays. He tells the villagers, “You touch – you die!”, in a mix of most basic language skills, a healthy dose of European hyperbole, and very bad judgment.

One day the bird is gone. His gardener is gone as well. Blackthorne asks around. The villagers tell him they couldn’t deal with the smell any longer, and the gardener volunteered to remove the bird.

Ok, and where is the gardener now?

He got killed – just as you instructed us.

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last week’s posting created quite a stir in the community - thanks so much for your feedback! I’ve had several conversations about Iran’s weapons capabilities and nuclear development. Thanks for the prompt - here’s a deep dive. I think the answer is not what you expect. Hope this is an interesting read!

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February 4, 2003. New York City, a Waldorf Astoria suite. U.S. Secretary of State Colin Powell paced his hotel room like a maniac. Bursts of shouting into a telephone. “I’m not reading this! This is bullshit!” On the receiving end: staffers of Vice President Dick Cheney, CIA analysts, and his chief of staff Colonel Lawrence Wilkerson.

Pages of a PowerPoint presentation deck lay on the writing desk at the Waldorf Astoria, some pages on the floor. On the slides: technical drawings, details highlighted in exploded views. Trucks on the outside, chemical laboratories on the inside. Sophisticated enough to breed complex biological agents like anthrax and botulinum on the go. Other slides showed weapons depositories for mustard gas, VX gas and sarin.

(Mobile bioweapon facilities. Source: Slide 21 of Colin Powell’s address at the UN Security Council).

(Chemical weapon facilities. Source: Slide 12 of Colin Powell’s address at the UN Security Council. Nerve agents like sarin or VX manipulate the transmission of nerve impulses. Exposure leads to muscle twitching, escalates to full-body convulsions, and paralysis of breathing. A small droplet on the skin is lethal.)

(Centrifuge component for uranium enrichment. Source: Slide 31 of Colin Powell’s address at the UN Security Council).

Another slide showed an aluminum tube, supposedly used in centrifuges to enrich uranium. Random aluminum tubes as definite evidence of a nuclear program? The slides drove Powell into exasperation – he was expected to present evidence at the United Nations Security Council the next day, but Powell was certain: nobody was going to believe this bullshit.

U.S. President George Bush Jr. had asked him to deliver the notes because Powell had a stellar reputation as a credible, no-nonsense authority. But after presenting that material, he knew, his reputation was toast.

(February 5, UN Security Council. Colin Powell delivering his famous speech. CIA Director George Tenet (left, behind Powell) literally covering his back.)

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Greek historian Herodotus recorded the story of King Croesus, a man of unimaginable wealth and the last king of Lydia who lived in the 6th century BC.

Croesus was worried about the rise of the Persian empire. He considered a military campaign but consulted the famous Oracle of Delphi for advice.

The Oracle told him, if he should march against the Persians, he would destroy a great empire.

Croesus felt encouraged – but his army was defeated, and the empire which fell was his own.

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Prophet Muhammad, the founder of Islam, died in 632 without a designated successor. A majority of Muslims believed his successor should be chosen from his companions and elected Abu Bakr, a close friend, as the first caliph (deputy). The group eventually became known as Sunnis, from “Sunnah”, the traditions and practices of Muhammad as interpreted by this community.

A smaller group however believed that Muhammad wished that leadership remained within his family, invoking a famous sermon of the prophet in which he designated his cousin Ali ibn Abi Talib. That group became known as Shia, from “Shiat Ali” meaning “Party of Ali”.

Both factions claimed leadership, but Sunnis initially prevailed. Civil wars followed, and leaders of both factions were murdered. In 680, a son of Ali, Husayn, started a new campaign to wrestle leadership from Sunni leader Muawiya ibn Abu Sufyan. His mission was intercepted at the city of Karbala (today: Iraq) and massacred in a brutal battle.

The Martyrdom of Karbala became a foundational myth for Shia Muslims. Husayn turned into a symbol for sacrifice and opposition to oppressive rule which Shia Muslims commemorate annually.

Operation AJAX

Iran first became a pawn of geopolitical interests in 1953, when Iranian Prime Minister Mohammad Mosaddegh nationalized the Iranian oil industry. The industry had previously been dominated by the British-controlled Anglo-Iranian Oil Company (today: BP/ British Petroleum) which was building its stake in the first global oil boom in the 1950s, a period of rapid international industrialization.

Iran was a constitutional monarchy but with a democratically elected government. To maintain western influence, the CIA together with the MI6 orchestrated Operation AJAX, a coup d’etat which removed the Mosaddegh government and strengthened the power of the Shah, who hadn’t been more than a ceremonial figure under the Mosaddegh government.

The Shah was initially viewed as a modernizer and reformer, but his power eroded soon. Not a first in economic history, the huge money that arrived from resource wealth led to bribery, embezzlement, corruption, and nepotism. As dissent with the Shah increased, he responded with brutal repression, imprisoning and torturing opponents. Economic disparity increased rapidly as wealth from oil went disproportionately to urbanites and the Shah’s inner circle. And the westernization alienated religious conservatives who saw Islamic values eroding.

Opposition groups eventually united under Ayatollah Khomeini, an exiled opposition leader. When he returned to Tehran in February 1979, the Shah’s regime was already weakened from months of violent protest across the country. The Shah fled, and Khomeini took over just days after his return. He established the Islamic Republic, a theocracy with Khomeini as the Supreme Leader.

Maximum escalation

Attacks on Iran started in the morning of February 28, 2026, with a surprise strike on the Tehran compound of Ayatollah Khamenei, Khomeini’s direct successor. It was carried out by Israeli missiles and intended to be a preemptive maneuver to remove Iranian leadership. The attack was marketed as a resounding success, as Khamenei und several other top leaders were killed. Intelligence analysts had collected ground data for months about daily routines, itineraries, and meetings of Khamenei but were still pleasantly surprised by the effectiveness of the attack.

But Iran answered with a counterstrike whose full impact still hasn’t filtered through. It attacked Saudi Arabia’s largest refinery Ras Tanura, one of the world’s biggest with an output of 550,000 barrels/ day with simple, slow drones and forced it to shut down. It destroyed a billion-dollar surveillance installation in the UAE, the THAAD radar station, supposed to monitor missiles thousands of kilometers away. It attacked U.S. military bases across the countries on the Persian Gulf, making operations on them much more difficult or even impossible.

Iran’s strategy: turn the war into a regional conflict, and thin out anti-missile defense. The U.S. only has so many rockets; the more countries they have to protect, the bigger the gaps in the shield.

On Sunday, March 1, Iran radioed an uncoded message across the seas to every vessel: stay off the Strait of Hormuz. Passage isn’t safe any longer.

Western intelligence analysts had thought that the Strait was a no-touch area for Iran to maintain goodwill with the Arab countries in the region. That belief turned out to be wrong if not naïve. Right at the time the world is transitioning to natural gas as the key carrier, Iran shut down the passageway for 25% of global LNG trade, and 20% of global oil trade. Maximum escalation had arrived much earlier than expected.

Qatar was forced to shut down production of natural gas but also intermediate and final chemical products like ammonia and fertilizers. Qatar serves mostly Asian markets, and regional gas benchmark prices jumped by 30%. European gas benchmarks (TTF/ Title Transfer Facility) have spiked by 85% in just two days.

Regime change?

The underlying goal of the U.S.-Israel coalition is to force another regime change in Iran. The strategy to get it done follows the failed template of the 1991 Iraq War. You will remember the U.S. bombed Iraq for four weeks, expecting to weaken Saddam Hussein’s regime so badly that Iraqis could finish the job themselves – Iraq was internally already divided with three competing population groups, a Shia majority, and Sunni minority, and Kurds in the north. Shias and Kurds had long been violently oppressed by Hussein who didn’t even hesitate to use biological weapons (VX nerve gas) to suppress uprisings. But despite the bombing campaign, Hussein squelched a revolution after the war before it even began.

Iran is a completely different challenge in every dimension.

• Contrary to almost all Arab nations in the region, it was not created on western politicians’ drawing boards after World War I, but it has existed as a sovereign territorial entity for thousands of years – one of the oldest continuous civilizations mentioned first already in the 7^th century BC.

• Shia faith is characterized by its strong, central spiritual authority represented by the Ayatollah and strong hierarchies (in analogy to Christianity, Shias are the Catholics with strong spiritual leadership by the pope) – in stark contrast to Sunni Islam which is more decentralized and lacks a single religious authority. Religious scholar and local imams operate with significant authority, unthinkable for Shia Islam1.

• Iran is the only major country with a Shia majority and a government which is explicitly a Shia theocracy. As a theocracy, the clergy is intertwined with bureaucracy which provided strong control of the country in the past.

No doubt, political opposition against this theo-political system has been building. Growing parts of the population believe it has failed to develop the country. The system prioritized ideological purity (brutally expressed through the IRGC and morality police) over economic and social progress, which led to new unrest and several protest waves including the January 2026 protests which resulted a in large number of casualties – the true extend is unknown. It seems that a majority of the population now favors a separation of state vs. religion, abandoning theocracy, and a democratically elected government. Those views are supported mainly by the younger and urban population. But are they prepared to go into civil war with the IRGC which is very well organized, equipped, with power structures which reach into every corner of the country? The theocracy is more deeply entrenched than most western politicians like to believe. From this perspective, the attack on Ayatollah Khamenei may actually have been counterproductive. Khamenei fully understood Israel was coming for him but still stayed in his residence. As a man of faith, in fact the most senior spiritual leader, who was he to defy Allah’s will? If his hour had come, so be it – inshallah. His death likely strengthened the resolve of traditionalists.

In Iraq, the uprising failed even though it included battle-hardened fighters especially among the Kurds, and the government represented only a minority in the country and had much less legitimacy. Regime change was brought only in 2003 and with 100,000 boots on the ground. It also resulted in the forever wars.

Energy prices

Make no mistake, we’re looking at the biggest disruption in oil supply ever. If the war keeps going even for only a few weeks, the impact will be much larger than in previous episodes of price shocks like the embargoes in the 1970s.

The rise in the last three days (+20% of key benchmarks like WTI and Brent) reflected a “war premium” (heightened uncertainty) but no supply disruptions. Once strategic reserves are depleted, which will happen in a few weeks, oil prices will start climbing by much more. Just projecting prices based on the experience of the 1973 and 1979 embargo shocks (+300%/ +250%) will result in prices of $200/ barrel2.

If the Strait remains shut, they might go much higher. The world economy cannot deal with a 20% decline in oil supply. The Strait of Hormuz has become the most critical asset in the conflict. Who controls the Strait controls the outcome of the war.

The question now is, what can the U.S. do to gain control?

On March 3, Donald Trump put out a Truth Social posting ordering the United States Development Finance Corporation (DFC) to provide insurance to tankers crossing the Strait (regular insurance companies don’t provide cover any longer in the region). He also said the Navy would provide escorts for safe passage.

How is the Navy supposed to provide cover to dozens of tankers daily? The Navy has 12 warships in the region. They have made sure to stay out of reach of Iran’s missiles (which are believed to have a radius of up to 300 kilometers). Crossing the Strait would bring them to a distance of 30 kilometers or less to Iran’s coast. It’s very easy for Iran to saturate the defense capabilities of a single ship or even a small convoy, especially considering there’s almost no lead time for countermeasures. Iran has spent at least 20 years building hidden, fortified missile launch bases along the coast.

Trump’s idea isn’t more than a desperate hipshot. The worst thing about his post? It’s reactive. It demonstrates the U.S. has lost the strategic initiative, only four days into the war.

Scenarios for the endgame

In a hardline scenario, Iran’s position is pretty straightforward: sit out Israeli/ U.S. bombing for a few more weeks and watch how oil stocks in the rest of the world are depleting. Even the U.S. is at risk, because its refineries are calibrated for Middle East oil qualities. Japan is 90% dependent on Middle East oil after turning off the Russian tap. Western countries will beg for peace negotiations which will largely follow Iran’s terms.

Minimum viability scenario: Iran will allow some traffic through the Strait in exchange for deliveries of critical supplies into the country, taking off pressures on both sides. But it will prolong the war with attrition on both sides, and a disadvantage building on the Iranian side.

Forced opening of Hormuz: the U.S. pries open the Strait. The chances of success are essentially zero.

Winners/ Losers

Winners:

• The U.S. energy industry becomes the only global low-risk super producer.

• Vertically integrated energy companies like Exxon, Chevron, ENI

• Russia, which sells oil at higher prices and sees much higher demand

Losers:

• Consumers worldwide

• Asian energy importers incl. India, China, and Japan

• Ukraine, as air defense systems/ restocking get diverted to Israel

• Europe, the biggest loser suffering the biggest price increases because of massive imbalances in its energy sector.

The decision to go to war with Iran was a huge mistake. It failed to consider a crucial escalation scenario and to define a clear off-ramp – what is the U.S. definition of success, and how can it get out? If there’s residual sanity left, the war will probably end with a humiliating retreat of the U.S., the end of sanctions against Iran, and higher risk premiums for energy products for several months. King Croesus is a classic example of hubris and the danger of misinterpreting warnings.

Let me know what you think,

All the best,

John

A century ago, a Greek teenage emigrant made his first money in shipping. He went on to create one of the most mythical business empires in the 20^th century. Today, a similar transformation is taking place, offering even larger opportunities. It is an offshoot of the LNG revolution which has received little attention – be the first to read about it here!

Hope this is an interesting insight. If you, please drop a like, comment, and share - this is ever so helpful to get broader traction. Many thanks!

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Aristotle Onassis was born to Greek parents in the Greek zone of Smyrna (today’s Izmir) in Turkey in early 1906, almost exactly 120 years ago. When Turkish troops took Smyrna in 1922 during the Greco-Turkish War, the town was set on fire. Several hundred thousand Greek and Armenian refugees were locked on the city’s waterfront, waiting for an evacuation – among them the Onassis family.

In 1923, Aristotle Onassis arrived in Buenos Aires, Argentina, at the time one of the fastest growing and most prosperous countries in the world. His first job landed him at the British United River Plate Telephone Company as a phone operator. The job allowed him to eavesdrop into confidential business communication. Backed by the intelligence he collected, Onassis launched an import business for Turkish tobacco which earned him his first batch of serious money.

A few years later, Onassis spotted the next opportunity. In the years of the Great Depression, unused freight ships sold for rock-bottom prices. Even though Onassis had relocated to New York by that time, he registered the vessels under “convenience flags” in countries like Panama and Liberia. That setup enabled him to operate his fleet at low costs. It also proved very convenient when World War II broke out – neither the Allies nor Germany could seize or confiscate his ships, sailing under independent flags.

When the war ended, Onassis was already running a solid business. But now, in his early 40s, Onassis made a legendary move which created one of the biggest fortunes of his time.

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Just when you think all is lost, there’s a flicker of light. Last week, a surprising earnings report came across my desk, incidentally the same day that Donald Trump announced his decision to revoke the “endangerment finding” of greenhouse gases. In fact, the report and his decision are closely related. They might even show a way out of Europe’s never-ending crisis. Another contrarian story – hope you like it! If so, please drop me a like, and please let me know your thoughts! This forum lives from dialogue.

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In September 2020, German industrial giant Siemens spun off its power production unit. Siemens is Germany’s largest company by market cap (almost 200 billion euros) and ranks #2 in the country’s lead index behind software producer SAP. Siemens was founded by electrical engineer and inventor Werner Siemens who incorporated the first subsidiary in 1847. The company built the world’s first telegraph and the first long-distance telegraph line. Siemens invented the dynamo, an electrical generator with permanent magnets. It built the first electrical generators and AC alternators. George Westinghouse, an American inventor who pioneered the use of AC (alternating current) electricity, based his designs on Siemens technology. Siemens developed electrical trains, streetcars, light bulbs, and electrical transmission systems – the foundations of an electrical economy. As the company grew, it scaled up its competencies. In addition to electrical devices, it became a technology leader in powerplant design including nuclear power generation.

By 2011, Siemens was a sprawling conglomerate with subsidiaries in every corner of the world. But that year, its fate changed. On May 30, 2011, German chancellor Angela Merkel held a press conference in which she announced that Germany would exit nuclear energy generation by 2022. It was the formal launch of the country’s energy transition. Merkel said that nuclear risks were not tolerable any longer after the Fukushima accident which had happened just a few weeks before. But Fukushima was just a scapegoat. In spring 2011, Germany had reached full operational capacity in a gas pipeline from Russia – NordStream 1. Merkel believed that Russian gas had her back when she decided to shut down nuclear generation.

But the Siemens share price tanked. It went from €95 in May 2011 to €67 in August and continued to slide to new lows in 2012. The power generation unit, formerly industrial pride, transformed into a liability. Siemens had leading competencies in the construction of large generators and turbines, 100-ton flywheels which rotated at 3,000 spins per minute; it didn’t have any noteworthy competencies in solar panels or glass-fiber windmill wings.

Siemens decided to pull the plug. It consolidated its power production business into Siemens Energy and spun it off in an IPO in late September 2020. The stock languished in markets. The wind energy division, Siemens Gamesa, experienced manufacturing quality issues leading to repair costs (and drops in production for owners) and loss of sales. Pushback against wind energy parks gained strong momentum, and an increasing number of projects had to be cancelled. Financial results of the unit are a sea of red ink. The hydrogen unit of Siemens Energy doesn’t even pretend it can be operated profitably. When Siemens opened its first hydrolyzer plant in Berlin a little more than two years ago, business unit head Anne-Laure de Chammard said that Siemens needed government guarantees and support to ramp up production. Bank financing had been “challenging”.

The opening price of Siemens Energy in fall 2020 was 22.01 euros, but three years later it was trading in single digits.

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After my posting last summer on Guyana we’ve had a few follow-up discussions on investment implications. At the time it seemed the momentum behind the debasement trade and AI was unstoppable, but news of the last few weeks (and a big announcement expected later this week) is pointing to a great opportunity.

Hope this is an interesting read! If you haven’t signed up yet, please consider a subscription – I think it’s really important to develop a long-term perspective. Many thanks!

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I wrote my first corporate research report on Exxon in the early 1990s as a student. Our corporate finance course instructor was a tough nut, an ex-Wall Street banker but with full Wall Street attitude. Roll calls at the beginning of every class. Five minutes late into class got you a no-show booking. Two bookings, she dropped you from the course.

Mind you, this was the time before the Internet. There were no fancy dotcoms around, no 10x engineers, no zero-to-one business models. The craziest thing ever to happen was the RJR Nabisco takeover by LBO firm Kohlberg Kravis Roberts1. And secondly, research meant actually calling up the investor relations department to ask for hardcopies of annual reports and financial filings, because neither e-mail nor EDGAR databases existed.

From that perspective, writing a research report on Exxon as my term paper wasn’t that bad. I thought there was a special angle to it – just a few years before, supertanker Exxon Valdez had run aground in the Prince Williams Sound in Alaska, which resulted in the largest oil spill ever by that time (it was pushed from the top spot by Deepwater Horizon in 2010). So, on top of a share valuation, I was looking for any meaningful financial liabilities from the accident (Spoiler: there were basically none).

In March 2023, the S&P500 was in the middle of a large market correction, down 17% from the peak of December 2021. The Federal Reserve had started an aggressive rate hike cycle, and bond yields exploded from around 1.5% (10-year UST) to 4%, the highest in 15 years – a nightmare scenario for equity markets whose valuations were based on “new normal”, ultra-low discount rates. After a disastrous 2022, investors braced for worse to come.

But on March 23, 2023, the world changed. Research lab OpenAI released Chatgpt-4, and what was a tool for tech afficionados before reached public consciousness. Valuations for AI-related companies exploded and drove the S&P500 from below 3,900 points to 7,000 in January 2026. You know the companies which drove the crazy spike, the Magnificent Seven. Consider Nvidia, the world’s largest company by market cap at around $4.7 trillions. Sure, Nvidia is enormously profitable – net income consistently exceeds 50% of revenues (55% in fiscal Q3 2026, i.e. calendar Q3 2025), and the company grows at an incredible rate. Paradoxically, it earns way more money than it can meaningfully use, hence the idea to lend money to its customers to buy even more Grace-Blackwell superchips. But how much can they sell in the end? If Nvidia kept its profitability forever (not going to happen), and paid out 70% of net income as dividends, it would still have to capture 10% of total capital expenditures in the U.S. economy to claim a $4.7 trillion valuation. I doubt they can do it. There’s still a lot of money going into passive/ index-replicating investments and FOMO behavior, but sooner or later realities will catch up with tech valuations.

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January has been a tough month for the EU. If you’re thinking Greenland – sure, that was a major surprise. But there’s an even bigger problem as European unity on core policies is collapsing with its leadership. Deep rifts are opening, and Europe’s policy hawks look weaker than ever before.

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In March 2015, the German population woke up to unpleasant news about the combat readiness of its armed forces, the Bundeswehr. It turned out that the workhorse rifle of the Bundeswehr, Heckler & Koch’s G36 assault rifle, malfunctioned quickly as the barrel heated up under repeat fire. The G36 was supposed to become a leading infantry rifle, feared globally for efficiency and accuracy. It was built with lightweight polymer materials, taking its cues from Austria’s futuristic Glock AUG rifle and famous pistols. The G36 also featured a weight-reduced barrel. But in combination, shooting accuracy dropped dramatically in real-world battlefield environments like Afghanistan, when consecutive magazines were emptied – from 90% accuracy to as low as 7% as the thinned barrel deformed under heat.

The German minister of defense, Ursula von der Leyen, quickly blamed the manufacturer and ordered a legal review for potential compensation and repairs of 167,000 rifles. Heckler & Koch vehemently denied design flaws and pointed to contract specifications. Performance under repeat fire hadn’t been specified anywhere, and German courts rejected the minister’s attempts to claw back money. German service personnel were left with the advice to fire only sparingly, and to keep the rifles out of direct sun exposure, please.

(Better take another gun next time, Ethan. Tom Cruise firing the G36 during the famous bridge escape scene in Mission Impossible: 3)

In the same year, von der Leyen ordered a renovation of the Gorch Fock, a majestic tall ship still in service for training at the German Navy. Initially, expenses were estimated at just below 10 million euros, but they soon spiraled out of control, reaching 135 million euros by 2019. A general review of weapons system readiness in 2017 revealed that only 38 systems out of 97 delivered were functioning, a devastating performance assessment for the responsible minister. When it turned out that consulting services for the defense department worth hundreds of millions of euros had been handed out without appropriate tender processes, von der Leyen’s career was finally over. She had taken office as defense minister in 2013 as the heir apparent of Angela Merkel, destined to become Germany’s next Chancellor. By 2019 it was clear she was politically untenable in Germany.

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