What’s the equity market pain threshold for the Trump administration?
Not SPX 6500, apparently, and probably not SPX anything. As Pam Bondi reminded investors while embarrassing herself on Capitol Hill last month, Trump and everyone adjacent to him thinks exclusively in Dow points.
Jokes aside, US equities are down four weeks in a row, and don’t think for a second Trump hasn’t noticed or doesn’t care. He has and does.
At the end of the day, Trump’s ego is the decisive factor in every policy decision and pivot. There’s a point beyond which stock losses are more embarrassing in his mind than being viewed as weak-willed.
No one knows for sure what that threshold is for any given crisis, and as we saw with the “Liberation Day” pivot last year, sometimes you need a kicker to force the issue. Then it was bonds that made the difference. Maybe this time it’ll be pump prices.
The figure above’s so simple a Trump voter could understand it. (Sorry, I had to do it.)
Trump likes to boast about everything he’s done for “your 401(k)s.” Right now, he’s tanking them. And the cost to fill up your tank’s up more than 25% in less than a month.
My sense is that the equity losses themselves aren’t near deep enough to force a pivot on their own, but when you throw in an enormous increase in gas prices over such a short window, it creates a political pressure cooker.
Trump over the weekend tried to bluff Iran into opening the Strait. Or maybe he’s not bluffing. We’ll find out Monday when he either starts bombing Iran’s power plants or not.
Tehran knows he’s hurting on this issue. On Sunday, the country’s de facto leader, Bagher Ghalibaf, said “the price of oil will remain high for a long time” if Trump targets Iran’s electricity grid.
I don’t know how much is left in terms of VaR shock potential in DM front-end rates after the last three weeks. Most of the unwinds, stop-outs and deleveraging have probably run their course. As noted here, traders are now pricing nearly four rate hikes from the BoE this year, and three from the ECB. In the US, STIRs reflect even odds of a Fed hike through the October meeting.
That’s all pretty extreme, particularly given the potential for high energy costs to divert spending from goods and services which, if sustained, could manifest as job losses and recession.
Still, rampant inflation uncertainty stemming from Trump’s Mideast melee can’t help but show up as rates vol, and where there’s rates vol there’s trouble. Simply put: Stocks won’t be in the clear until the distribution of inflation outcomes narrows. Because it’s only then that rates can exhale.
With little in the way of macro updates on the US docket (S&P Global’s PMIs are due, but that’s pretty much it), the price action will depend almost entirely on war headlines this week.
Looking at this from a more global perspective.. A lot of market commentary seems to rely on the brent price as they can observe it & concludes “100 bucks, not great, but the world has dealt with that before..”
Brent doesn’t remotely reflect the acuteness of the problem due to time, distance & incredibly long supply chains..
The PG oil (call it 20 pct of world supply) and PG gas (call it 5 pct of world supply) is gone, there is no catch-up.. for the end-user it is not gone yet as the supply chains are so long (most of the crude oil goes to north asia) so refineries are still running oil that was already on the water & people are still driving, but in a couple of weeks that wont be the case & there is no way to rectify that..
Put simply Asia, africa & to an extent europe will run out of refined products.. its a 20 pct supply shock to a system with very little inventory.. china has banned product exports so they will be ok but will starve their neighbours.. thats all lost economic activity.. factories operating sub-optimally, people stay home barring essential journeys, long haul flights cancelled.. (jet fuel is already 200 usd/bbl).. etcetera..
The SPR release doesn’t really help as its largely in the wrong place (the USA) and it does not flow nearly fast enough, the pipelines, docks etc are all congested..
So this will happen for a minimum of a month, even if the blockade ends in 10 days.. but the oil probably wont come back at the same rate.. (imagine shutting down all iraqi oilfields in an unplanned emergency fashion.. they dont come back fully at the flick of a switch, maybe never quite reach pre-war export rates)
More importantly, it would seem the iranians will be selective about who & what can use the straits..
So say its a 20 pct supply shock to the global economy for one month & a 10 pct shock for a second month.. this feels on the optimistic side
Surely this tips the world into recession ? The US stock market may look through it.. but I wouldn’t bet on it..
This would all be news to Trump. He is so busy plotting and talking, he has no time to listen to anyone.
I’m with you. Do not get me wrong. I’ve been going back and forth on how bad this is long term. My hangup is a nagging reminder in the back of my head saying that we were entering oversupply.
The world was in the midst of an increasing supply glut. Guyana is increasing production every day. Venezuela is beginning to re-enter the mainstream market and will, in the medium term, get restored. Russia is (with Trump) going to be re-mainstreamed. E&P has had a string of new finds.
Oil was going to $55 if this “excursion” hadn’t happened. If we re-rate, to take into account a production loss of 20%, that’s still in the $75 range. Shouldn’t the current, no escalation or psychological risk included – which is a big ask, situation be survivable after a month or two of disruption?
How much more absurd does it actually have to get before rhe Mad Clown is removed?
(Asking for a friend, obviously)
A mad clown won’t, unfortunately, ever be removed by an army (or legislature) run by mad clowns!
I don’t see any situation short of two very unlikely events, either China militarily siding with US-Israel forces to mobilize an offensive to open the Strait, or Trump TACOs so hard and gives so much to get Iran to stop that it openly embarrasses him.
My base case is that Iran will seek to drag things out and inflict economic damage through at least the US midterms in an effort to impact the outcome.
Everyone seem to think this will all get wrapped up in a few weeks/months. That seems very unrealistic to me. They murdered their holy leader, the people on the street might not be too upset about the Ayatollah’s death, but the people who control all the weapons and money sure are. The US has no off ramp it controls. Iran controls the off ramp. Iran will require massive incentive to choose to be appeased. Otherwise Iran keeps the Strait closed.
I believe the extreme nature of the reaction is the market’s extreme under reaction. The Fed’s analysis of the 1970’s oil supply shock generally says the Fed’s error was not going hard enough, fast enough, and long enough with rate hikes and the employment challenge needs to be addressed only after inflation is entirely tamed.
$150 Brent is on the table for April, which puts WTI at least at $120. May could see Brent at $200+ and WTI at $150+. The Fed has to consider a hike in June if/when this happens.
Energy prices, other commodity shortages, interest rates, are going to bleed into 1Q calls and guides.
Brilliant graphic in column header. Worth several thousand words to a flesh and blood human ‘agent’
+1