This episode unpacks the collision of geopolitical flare-ups, U.S. fiscal pressures, and the AI arms race, signaling a potential paradigm shift in global capital flows and investment strategy for Crypto AI investors.
Geopolitical Escalation: Israel-Iran Conflict and Oil Market Impact
- The discussion opens with the recent escalation between Israel and Iran, specifically Israel's reported strikes on Iranian nuclear program sites. This event triggered a classic risk-off rotation, with oil and gold prices surging overnight.
- Felix highlights analysis from Anna Wong of Bloomberg, who modeled that oil prices breaking $130 per barrel could push the GNCPI (Global Nominal Consumer Price Index) – a measure of global inflation – from under 2.5% to 3.9%. This underscores the significant inflationary risk tied to the conflict.
- A critical chokepoint, the Strait of Hormuz, through which 26% of the world's oil trade passes, is identified as a major tail risk. Iran's potential to blockade this strait is a long-standing concern, with PolyMarket—a decentralized information markets platform—showing 42% odds of Iran attempting disruptive action.
Market Reactions and Buyback Support
- Despite the significant geopolitical news, Tyler notes that crude oil was only up about 5% and the broader market down just 30 basis points at the time of recording. He observes, "everyone, you woke up, VIX was at 20, it's getting faded already, and you just got to sell the vol on every turn on geopolitics."
- Tyler, drawing on his market structure expertise, points to corporate buybacks as a key factor providing a bid under the market, suggesting they likely pick up during such events. He emphasizes watching credit spreads for signs of genuine systemic risk, which were not widening significantly.
- Quinn expresses surprise that the Trump administration would greenlight actions leading to higher oil prices, given prior efforts to lower them. He notes U.S. oil producers have been cutting capital expenditures, and Iran might target U.S.-linked oil fields as a more impactful retaliation than direct attacks on Israel.
Federal Reserve Outlook and Economic Data Review
- The conversation shifts to upcoming economic data and the Federal Reserve meeting. A surprisingly "cool" CPI (Consumer Price Index) print was discussed, with significant services disinflation and a notable miss to the downside in core CPI month-over-month, unexpected by most economists.
- CPI measures the average change in prices paid by urban consumers for a basket of goods and services.
- Deflationary pressures from airline fares and gasoline were key drivers, though gasoline prices are expected to reverse. Inflation expectation surveys have also started to revert lower, and consumer sentiment is improving, suggesting recent soft data weakness was "vibe/fear-based."
- On the labor front, while initial jobless claims remain stable, continuing claims surprised to the upside, reaching a cycle high. Felix cites Eon Burgerer's analysis, indicating the labor market might be more fragile than headline numbers suggest, with difficulty finding new employment if a job is lost. The upcoming JOLTS (Job Openings and Labor Turnover Survey) data will be crucial.
- JOLTS data provides insights into labor demand through job openings, hires, and separations.
- Quinn suggests the administration is applying cyclical downward pressure on growth via tariffs and immigration to suppress inflation short-term, but these measures are structurally inflationary long-term due to supply chain reworks and tighter labor supply.
U.S. Treasury's Refinancing Challenge and Rate Expectations
- Tyler emphasizes the immense scale of U.S. Treasury issuance, noting that roughly half of all new fixed-income products are Treasuries, with an estimated $7 trillion needing refinancing over the next year. He argues, "they will manufacture the numbers whether they adjust inflation to somehow lower rates here because they need they need they have to refinance."
- Fed funds futures indicate an 80% probability of an interest rate cut by September. The discussion touches on the post-Powell era, anticipating a "turbo dove" as the next Fed Chair, potentially leading to significant rate cuts to manage the interest expense on government debt, especially with a large portion of refinancing being short-term bills.
- The U.S. Treasury has also been actively repurchasing debt, including long-end buybacks, effectively a form of quantitative easing (QE) even outside formal programs. This, combined with a rising weighted average maturity of outstanding Treasuries, presents an existential risk if long-term rates spike.
- Quinn anticipates a "mother of all curve steepeners," believing the Fed will be forced to cut rates due to weak growth, while long-end yields rise due to supply pressures, especially once the TGA (Treasury General Account) refill begins.
- The TGA is the U.S. Treasury's main operating account at the Federal Reserve.
The Unwinding of the Global U.S. Dollar Trade
- Felix introduces a critical piece by Kirill Sokolov from 13D Research detailing the "giant carry trade" of the last 40 years, where Asian economies recycled export earnings into U.S. dollar-denominated assets. These economies now hold approximately $7.5 trillion in U.S. stocks and bonds.
- A carry trade involves borrowing in a low-interest currency to invest in a higher-yielding one.
- Sokolov questions whether the U.S. can indefinitely abuse its "exorbitant privilege"—the benefits derived from the U.S. dollar being the global reserve currency. The potential unwinding of this trade, where Asian economies repatriate capital, could lead to "capital Armageddon" and a collapsing dollar.
- Quinn views this as a primary dynamic, stating, "When this reverses, our dominance has it's a reflexive thing." He argues this unwinding contributes to headwinds for U.S. equity outperformance, favoring assets like gold, Bitcoin, and non-U.S. equities, despite recent U.S. market strength.
- The speakers note that while U.S. indices like the NASDAQ have surged, gold, Bitcoin, and many international equity markets have already hit all-time highs, partly due to currency effects, signaling a potential relative underperformance for U.S. assets if the dollar devalues.
The AI Arms Race: Geopolitics, Productivity, and Market Structure
- Tyler brings up the inelastic market hypothesis, citing Jefferies' research suggesting that $1 of passive inflow can have a $5-$8 impact on index levels, potentially 20x for MAG7 stocks due to choked floats and buybacks.
- The inelastic market hypothesis posits that in markets with significant price-insensitive flows (e.g., passive investing), capital inflows/outflows can have a disproportionately large impact on prices.
- This market structure, combined with a genuine AI-driven productivity boom (with AI startup revenues growing significantly), could explain continued investment in U.S. tech giants despite broader macro headwinds. Tyler questions, "why would global investors actually repatriate if you have if if that narrative actually plays out?"
- The geopolitical dimension of AI is highlighted, with Felix referencing an Andreessen Horowitz interview suggesting the future will be dominated by either Chinese or American AI. Tyler frames this as a "21st-century space race," arguing, "we need to get that first otherwise you're screwed," which necessitates continued economic stimulus and market support.
- This leads to the idea that markets are becoming a "political utility." Investments in AI infrastructure, like nuclear power (e.g., Vaneck Nuclear Uranium ETF - URA), are seen as strategic plays on this theme.
The episode highlights how U.S. fiscal imperatives, geopolitical maneuvering, and the AI supremacy race are converging, likely forcing continued market support and risking currency debasement. Crypto AI investors and researchers should closely monitor U.S. Treasury actions, dollar dynamics, and AI infrastructure build-outs to navigate increasing volatility and identify opportunities in non-sovereign, technologically advanced assets.
