Executive Summary

The Hormuz shock of 2026 is not 1997. But it rhymes. A major external disruption is sorting the global economy by structural architecture — and for the second time in thirty years, the United States holds the winning hand.

• Reserve currency status, energy self-sufficiency, and an AI investment boom that mirrors the late-1990s technology cycle are together providing insulation that Japan, South Korea, and Europe simply do not possess.

• The relative outcome is the same as 1997.

• The absolute experience is harder — and the gap between what financial markets are pricing and what physical markets are saying is where the next trade lives.

Where We Left Off

The last issue of this series asked a foundational question: Is the Hormuz Shock a Productivity Regime Shifter? The answer was careful — not yet, but the clock is running.

As mentioned in the same note, the United States entered the Hormuz shock in possession of something historically rare and fragile: a pro-cyclical abundance regime defined by three simultaneous pillars — supply chain abundance, a mature and productive labor market, and a fixed investment boom anchored by AI hyperscaler capital expenditure.

That combination, last seen in the late 1990s, had produced the first sustained episode of non-recessionary productivity growth in a generation: lower inflation, supply chain normalization, and expanding margins without policy tightening.

Two forks in the road were laid out:

• Path one: Temporary shock, productivity dips, supply chains normalize, abundance regime resumes.

• Path two: Persistent supply instability drives firms from optimization toward resilience investment, raises structural costs, and shifts the economy toward something more European in its productivity and growth outlook.

• The note was explicit that the 1970s stagflationary parallel was not the base case.

• A hybrid regime of moderate inflation, weaker productivity, and volatile growth was the risk scenario that mattered.

Six weeks on, the physical data and the activity indicators have done meaningful work sorting between those two paths. The general architecture holds but several specific calibrations need to change.

Thus, this note integrates that evidence and expands the framework to include its international dimension — because the global distribution of this shock is as important as its domestic transmission, and understanding who loses more is essential to understanding why the United States still comes out ahead – and what the trade is.

The macroeconomic risk of 2026 is not a pullback in GDP or a one-off price shock. It is the growing risk to the post-pandemic abundance regime itself — and the uneven distribution of that risk across the global economy is the 1997 playbook on repeat.

I. The 1997 Blueprint: Architecture, Not Accident

To understand why the United States is structurally better positioned than its peers in the current Hormuz shock, one must begin not with today’s oil markets but with a currency peg in Bangkok in the summer of 1997.

The Asian Financial Crisis is often taught as a story about contagion. That framing is technically accurate but analytically insufficient. The real story is about architecture — the lethal combination of fixed exchange rates, which led to a balance of payment problem, unhedged foreign-currency debt, and the absence of institutional buffers that separate a manageable shock from an existential one.

Thailand’s baht came under speculative attack in July 1997. The peg broke. Dollar-denominated debt became immediately and catastrophically more expensive. Banks went insolvent. Credit froze. Contagion spread not because of shared economic fundamentals but because investors searched for the same currency mismatch architecture elsewhere and found it.

Indonesia contracted by 13 to 14 percent in 1998. Thailand fell roughly ten percent. South Korea, six to seven. World economic growth slowed from roughly four percent in 1997 to 2.5 percent in 1998.

And yet the United States kept growing — at 4.5 percent in 1998 — not by accident but by architecture. The exorbitant privilege, floating exchange rate, deep capital markets, and a domestic technology boom provided insulation that no other advanced economy possessed.

Capital fled crisis countries and flooded into dollar assets. Falling commodity prices from the Asian demand collapse functioned as a tax cut for American consumers. The Okun transmission barely fired.

Figure 1. Real GDP growth, 1998. US grew 4.5% while crisis epicenters contracted 7–13%. Source: World Bank / IMF.

II. 2026: Same Architecture, Different Transmission

The Strait of Hormuz closed in late February 2026 following US and Israeli airstrikes on Iranian military targets. Tanker traffic through the strait has fallen approximately ninety percent since March 1st. Baker Hughes told investors it assumes the strait will not fully reopen until the second half of 2026. A Dallas Fed survey found nearly eighty percent of oil and gas executives share that view.

This timeline is consistent with what was written here, which diverged from the OECD’s more optimistic reopening assumptions — a disagreement that the physical data has since resolved.

That’s said, reserve currency architecture remains intact and actively functioning. Global capital, frightened by the scale of the energy disruption, continues to seek the safety of dollar-denominated assets.

Foreign portfolio inflows into US Treasuries, corporate debt, and equities were at their strongest levels in over twenty-five years as of January 2026, and the conflict has reinforced rather than reversed that dynamic. The narrative of a Sell America trade has no basis in the flow data.

Figure 2.

One important precision note: the TIC data referenced runs through January 2026 because of the six-week publication lag. The statement holds but it’s worth knowing the January figure is the last available data point at the time of this writing, not a real-time reading.

Three differences from 1997 sharpen the analysis.

• First, in 1997 the United States was a bystander; in 2026, it is an active belligerent bearing military and diplomatic costs.

• Second, in 1997 the US consumer caught a tailwind from falling commodity prices; in 2026, the US consumer catches a headwind — an energy price spike that functions as a regressive tax.

• Third, the dollar story is more complicated than 1997’s clean safe-haven appreciation.

US economic activity makes the domestic transmission visible in a single data contrast.

• Nominal consumer activity registered 2.9 standard deviations above zero-percent real growth.

• Real consumer activity registered 0.3 standard deviations.

• That spread is the inflation tax made statistically legible.

Figure 3. Nominal vs. real consumer activity indices, Oct 2025 – Apr 2026 (est). The 2.6σ spread is the inflation tax: households spending more nominal dollars for less real consumption. Underlying Data Source: Employ America.

III. The Dollar: Exorbitant Privilege Meets Fed Politicization

The 1997 episode produced a textbook safe-haven dollar surge. In 2026, the initial phase of the Hormuz shock has produced a similar temporary pattern — risk aversion supporting the dollar as the conflict broke.

But the medium-term dollar trajectory looks materially different from 1997, and understanding why matters for portfolio construction and for interpreting the relative growth story.

The divergence comes from the Fed. Increasing political pressure on the Federal Reserve to ease policy ahead of midterm elections — pressure to cut rates even as core PCE runs above four percent — is the mechanism through which dollar weakness emerges not as a reserve currency crisis but as a conventional rate differential story.

When the Fed expectations and forwards guidance guide nominal yields below what the economic data would otherwise require, real rates fall relative to the rest of the world.

That is toxic for the dollar on a medium-term basis even if short-term risk aversion provides temporary support.

For this reason, Pinebrook maintains a short position in US duration, expressed by short ZN, the US 10-yr futures contract.

This creates an important distinction: reserve currency status and dollar direction are not the same thing. Reserve currency status — the structural demand for dollar-denominated assets, the exorbitant privilege — remains intact. Foreign portfolio inflows confirm it.

But the dollar can weaken on a trade-weighted basis while reserve currency status is perfectly fine. That is precisely what happened after the global financial crisis in the 2010 to 2013 period and is what the current rate differential structure implies for the year ahead.

Reserve currency status is a structural feature. Dollar direction is a cyclical one. In 1997, both pointed the same way. In 2026, they diverge — and that divergence is as important for portfolio construction as the growth story itself.

Figure 4. Illustrative USD index behavior: 1997 (continuous strengthening) vs. 2026 (safe-haven spike then gradual medium-term weakening driven by rate differential compression). Source: Pinebrook estimates.

USD price action below, since a negotiated settlement became the dominant strategic goal in US policy, reflects the above.

Figure 5. Dollar Currency Index. Source Bloomberg LP

IV. The Global Growth Map: Who Wins, Who Loses

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Said Bob Dylan but performed better by Jimmy Hendrix, in this writer’s opinion.

The above reflects the disbelieve over a market that has had one of its strongest comeback streaks ever whilst in what is arguably the largest energy crisis, ever.

Make it make sense!

These pages will strive to do just that by focusing on frameworks, not predictions. That said, Destiny is still in play in the targets laid out last week – both in original form and revised.

We start by reminding readers of a framework these pages used to map out the 2025 post-taco trade last summer. After getting a reflexive spring bounce in May and June, the question investors were grappling with at the time was, what is the future impact of the tariffs on the economy? Wen Q3 or Q4 2025 recession?

These pages took the contra on July 19, 2025 and made a firm case for remaining bullish on the U.S. economy, and on risk assets, based on the forward looking probabilities that the market was pricing.

The model that was used was simple: a variant of the Monty Hall Problem. The relevant excerpt is shown below.

Suppose you are on a televised macroeconomic game show. You are given the choice of one of three doors. Two of the doors have a turd for a prize, symbolizing low or negative growth. Behind one of the doors is a Lamborghini sport car, symbolizing a bull market.

• You pick door one, not knowing what it is behind it of course.

• Meanwhile, the game show host – who has perfect information – opens door three and reveals a turd.

• You now have an option to stay with door one (the unknown turd), or switch to door two (the Lambo).

What do you do?

• Being the clever thinking person you think you are, you reason that left with two options, your choice is a fair value 50/50-coin toss of chance.

• You will either get a turd market or a bull market Lambo.

• Recall, you do not know that behind your initial choice of door one, lies a turd.

This is wrong way to think about the problem.

• The reveal of the turd behind door three introduced new information: the odds of the Lambo being behind door three fell to zero.

• The joint odds of the Lambo being behind door two OR door three were always 66% (1/3 + 1/3).

• Eliminating door three as a Lambo door concentrates the probability of the Lambo being behind door two to 66%.

Frederich Hayek, patron saint of free-market libertarians, emphasized that prices act as a form of information within an economy because they aggregate and transmit dispersed knowledge.

• Recent price action has informed market participants that the near-term probability of a recession is at or near zero.

• That is, door three has been opened and we know that a recession is off the table between now and calendar year end.

• Thus, the probability of a 2025 bull market has gone from 1/3 to 2/3.

• With improved future probabilities, economic agents (firms and consumers) are better able to re-consider their appetite for real, economic risk to the upside, and act accordingly.

For those with physics envy, think of the above as a slow motion Lévy Flight, which is a random walk characterized by small displacements and occasional very large displacements.

In market speak, this is a repricing of market expectations, from a turd to a Lambo.

/FIN

Markets find themselves in a similar place of price discovery and probability mapping as they did last year. With President Trump looking for an off-ramp, he has revealed new information:

• A quick resolution is the new strategic goal.

• Other considerations are taking a back seat; the red lines are fictional narratives. GTFO is the new political reality for an unpopular war no one wanted.

• The worst case is off the table.

By eliminating the economic turd of a recession due to an extended interruption of supply lines, the market is now probabilistically weighing a continuation of the bull market.

Markets Are Not Ignoring the Shock

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An addendum at the end will provide an update.

Introduction

The prior note in this series laid out a framework for projecting Brent crude physical prices over the next three months, given the assumption of a prolonged closure of the Strait of Hormuz and an extended interruption in oil flows.

• Since then, physical (“dated”) Brent has collapsed from the mid $120-levels on April 8th to a current $116-handle, after having tagged $144/bbl the day before.

• This movement was also reflected in paper (futures) markets, after President Trump mentioned peace talks in Islamabad, which promptly dumped soon thereafter.

The targets laid out still stand given the assumptions. Kill the assumptions, kill the targets. Hold the assumptions, hold the targets.

Readers can make up their own minds about the expected length of the interruptions based on their political, diplomatic, military, or strategic priors. In the meantime, markets will ebb and flow to price the relevant new expectations given changes in the information surface.

With two weeks to go until the April 30^th expiration of the June 2026 contract (COM6 <Commodity> GO on Bloomberg or BZM26 on the CME/ICE exchange), traders need to set aside such priors and focus on the upcoming reality of the June contract expiration: buy, sell, or roll the contract. There is no other option.

Shiny toy models are tired, skin in the trading game is wired.

Thus, this note is intended to frame the evolving structure of the crude oil market and to provide a probabilistic roadmap for the settlement of the June 2026 Brent futures contract.

The discussion integrates financial flow dynamics, physical market structure, arbitrage mechanisms, and refinery economics. The goal is not to predict a single price, but to define the range of outcomes and the conditions under which each outcome materializes.

Mind the Gap

As of April 16, 2026, the Brent market is exhibiting a quantamental fracture. The June 2026 (BZM26) paper contract is trading at $97.90, while physical dated Brent remains anchored at $116.74. This $18.84 gap is the battleground.

A conventional framework for pricing settlement price is simply the spread between physical and paper markets. Brent futures must converge to the physical market into expiry. This is not optional - it is enforced by arbitrage.

This isn’t wrong. But it is certainly incomplete and requires more nuance.

Futures do not converge to spot; they converge to the average physical price over the pricing window, which is itself influenced by various factors.

In effect, the June futures contract is a projection on physical tightness into June. More precisely,

Settlement ≈ ICE Brent Index ≈ f(Forward Brent, Dated Brent, CFD structure)

The appropriate way to approach the problem set is not by forecasting an oil price. We are solving for physical benchmark during pricing window, which requires mapping dated Brent (and forward Brent complex) into mid/late May → June.

What This Means Mechanically

Five elements are required to develop a projection for the June contract price at expiration.

• The price of physical dated Brent. Brent futures are not abstract gambling instruments. They are tied to a physical settlement mechanism, which is linked to the ICE Brent Index.

• Settlement is based on a basket of physical cargo pricing from the BFOET complex. BFOET stands for Brent, Forties, Oseberg, Ekofisk, Troll, plus West Texas Intermediate crude (WTI) from Midland, Texas, during the final trading days of the futures contract.

• The CFD market (contracts for difference), which tracks the spread between physical dated brent today and the forward month. It is the physical bridge in markets.

• In the North Sea market, the CFD swap allows traders to hedge the risk of physical oil prices changing between the time they buy a cargo of oil and the time it unloads.

• The DFL market, (dated to frontline swap), which represents the basis risk between physical and paper oil markets. It is the financial bridge in markets which allows traders to lock in the difference between physical and paper markets should they move in opposite directions.

· If one has physical cargo priced off dated Brent, but hedged with Ice paper futures, one is exposed to the risk these two benchmarks move differently. A DFL cancels this risk.

• Arbitrage and logistics, as the introduction of WTI in the settlement price of Brent introduces arbitrage. Logistics involves the carry associated with transportation costs (cargo leasing), cost of capital to fund an operation, insurance, and other costs that go with the physical movement of crude.

• Refining Margins and crack spreads, which reflect refiner willingness to pay for crude.

Never Go Full Macro

The $97.90 price is a financial barrel of oil. It is driven by macro hedge funds and algos trading the Pakistan Truce headlines. These participants are shorting the front-month, betting that a 14-day ceasefire will reopen the Strait of Hormuz and collapse prices at some point T + timeT in the future. They are trading expectations, not molecules.

The initial move in paper crude oil—from sub-$100 levels toward the $110 - 120 range - was not driven by physical scarcity alone. It was, instead, a classic financial convexity event, consistent with the framework outlined by the Oxford Institute for Energy Studies.

The sequence unfolded in three stages:

• Macro Hedging Demand: Geopolitical escalation triggered large-scale call option buying from macro funds and real money investors. Oil was treated as a hedge against inflation and geopolitical tail risk.

• Dealer Gamma Feedback Loop: Dealers, short those calls, were forced to delta hedge by buying futures, creating a mechanical upward pressure on price. This is the point at which price becomes non-linear.

• CTA / Momentum Amplification: Systematic strategies and momentum funds entered the market, further extending the move. However, these players are volatility-sensitive, and as realized volatility increased, their position sizes began to shrink.

Read more

Preamble

The equilibrium price for physical Brent oil is not determined by futures curves on a screen. It is determined by the price that ensures the last marginal barrel arrives where it is needed, when it is needed, and that enough demand disappears to make that possible.

This note outlines the structural dislocation currently unfolding in global oil markets, driven by the closure of the Strait of Hormuz and the resulting breakdown in logistics, inventory buffers, and product markets.

A temporary ceasefire among the aggravated parties in the Middle East does not change how physical Brent is priced. It may change timing, sequencing, or levels. But the mechanics remain the same.

The temporary ceasefire makes this note more relevant, not less. It does not change the mechanics of physical pricing - only the timing and sequencing.

Introduction

In the halcyon days of November 2019, those who were paying attention started hearing rumors about a mysterious virus that was getting people sick in China. Reports trickled in about the city of Wuhan being shut down, and about a collapse of its medical care delivery system.

The Chinese government came clean on December 31, 2019, when it reported cases of “pneumonia of unknown etiology” to the World Health Organization.

The myth of this being a Chinese problem was smashed on January 20, 2020, by the U.S. Centers for Disease Control when it identified U.S. Patient Zero, a 35-year-old man who flew into Seattle - Tacoma International Airport from Wuhan on January 15^th, as the first confirmed case of Covid in the United States.

On February 5^th, quarantines started as CDC medical officer teams met planes carrying passengers from Wuhan at military bases across the country. All passengers were placed under mandatory 14-day quarantine orders.

For most people in the United States, it was still business as usual. Schools and other gathering spots remained open, even though the reality of a global pandemic was staring us in right the face as evidenced by mass quarantines on cruise ships.

The containment narrative fell apart on March 2^nd, when an attorney infected his synagogue community in the New York City suburb of New Rochelle in Westchester County. Suddenly, it became untenable to deny that the country and the world were not on the precipice of a global pandemic event but rather already knee deep in it.

It was the “oh 💩” moment. And then all hell broke loose, in society and in financial markets.

To these pages, the market narrative appears suspended in the same state of disbelief and denial prior New Rochelle forcing a moment of self-awareness that snapped the market out of its delusion

There are a few things feeding the denial.

• Hopes that an early military de-escalation and subsequent durable political solution will emerge that gets oil flowing again through the Strait of Hormuz soon. We are not there yet. ❌

• The early-stage nature of the commodity shock which up until now, has not yet caused any shortages, although gas prices are ticking up, especially in California. ✅

• As of this morning, roughly 15-hours after the ceasefire, there is no meaningful movement of merchant marine vessels through the Strait. ❌

A ceasefire is a triage solution, but by no means permanent until there is a mutually agreed upon political solution that is durable and enforceable.

Till then, the Strait is risky and unreliable, and the war has made it effectively unusable at scale for the foreseeable future.In addition, the civilian infrastructure in both Iran and Gulf states makes an immediate re-boot unrealistic.

The fog of war is compounded by the internal contradictions and incoherence of President Trump’s wartime strategy. Every day that passes without a political settlement simply compounds the problems that are expected to manifest themselves in the coming days and weeks.

As of today, most tankers that passed through the Strait of Hormuz prior to the war have already made landfall and emptied their oil.

• Deliveries to South Asia and East Africa were done by mid-March.

• Southeast Asia and Australia were done by the beginning of April last week.

• The last VLCC (very large crude carrier) that left before the Iran war is expected to arrive to its destination in a few days.

We now have one month of shortages locked in, as anything departing Hormuz today will not reach its destination for another month, on average.

Ships must enter congested ports, queue for unloading, and cycle through infrastructure that is no longer operating at pre-war efficiency.

This process alone will take weeks, under the perfect assumption that the infrastructure (ports, docks, pumps, refineries, and on and on) can do their job as they did prior to the war. Then there are the human capital losses (i.e., dead people) which degrades institutional knowledge, know-how, and manpower.

Reports of tankers getting through the Strait are noise and should be faded. Not due to their true or untrue factual basis, but because the marginal changes do not move the needle required to re-supply the market in time.

Since March 1^st, over 120 tankers have crossed the Strait. Average daily flows are down by 90%, give or take on who is counting the ships (satellites or land-based human intelligence). Below is chart of global crude in transit.

In the desert, the marginal rate of change from one drop of water to five is not going to keep you alive. The global economy is not much different when it comes to oil.

Sitting around counting that next drop isn’t very helpful.

The oil market had large buffers prior to the war, such as floating storage. These are now gone. The inventory math is quite simple and not resolved by a dozen or two tankers getting through the Strait.

• Even with the ceasefire, total inventories lost are -1.2 billion barrels by the end of April.

• End of May takes us to -1.5 billion.

• End of June is -1.8 billion.

H/t @HFI_Research

To remediate these storages, the market will need a surplus of +2 million barrels per day for 600, 750, or 900 days, respectively. The first replacement cargo is still 40-days from northern Europe (35 for sailing and a few days in queue, fill up, and go, assuming everything still works perfectly).

Thus, focusing on the marginal volume of ships and oil passing through the Strait is the wrong framework. After all, we know that some volume level of crude will sneak through, either clandestinely or via a hood winked back-room deal that may or may not involve some palm greasing at the toll booth. La Mordida, in Mexican slang, has a way of getting things done.

• Pirates have been doing this for millennia.

• Han Solo does it in the future under contract from Jabba the Hutt.

• Narco bros are it doing today.

Where there is money to be made at a supply choke point, someone will always risk imprisonment or personal injury to rake in above normal economic profits in an unbalanced market.

• What invites piracy is a structurally under-supplied market. Marginal movements of product (spices, intergalactic contraband, or meth and ya-yo) do not represent a path to equilibrium because they lack scale.

• Instead, piracy confirms the existence of a structurally undersupplied market that marginal movers cannot bring into balance. After all, a balanced market kills the margin arbitrage that covers the risk of getting killed or arrested.

Therefore, the appropriate framework is not in counting ships or tracking marginal flows. It is solving for the price that will balance future available supply with future demand at time T+X.

Analysis

We start with the premise that the paper market can trade meaningfully lower than the physical one because futures still embed reopening odds, policy intervention, eventual stock draw, short traders that are attempting to front run normalization of the curve, and some eventual mean reversion.

On the other hand, the physical market is priced by the marginal cost of the last barrel available to a refinery that must keep its units running.

Currently, physical barrels are commanding extreme delivered premiums: current physical Brent is at a 150-handle despite the overnight collapse in the paper markets.

The chart below is from yesterday, showing a 144-handle.

• It is higher today despite the ceasefire.

• Physical does not care about paper.

Determining the equilibrium price for spot physical Brent during a total closure of the Strait of Hormuz requires isolating the immediate physical deficit from the paper (futures) market.

Based on pre-war global flows and the current 2026 data, here is the first-effort equilibrium analysis:

The Physical Supply-Demand Gap

• Before the conflict, approximately 20 million barrels per day (mb/d) of crude and refined products flowed through the Strait, representing about 25% of global seaborne trade.

• On the crude side specifically, Saudi Arabia’s 5.5 mb/d represented 38% of Hormuz crude-and-condensate flows, which implies total crude-and-condensate flows through the strait of roughly 14.5 mb/d.

• Saudi and the UAE together have only about 2.6 mb/d of pipeline capacity available to bypass Hormuz in a disruption via the Abqaiq-Yanbu (East-West) pipeline in Saudi Arabia and the Habshan-Fujairah pipeline in the UAE.

That distinction is the key one. The headline spare-capacity number looks comforting at first glance: OPEC spare capacity is about 5.3 mb/d, including 3.1 mb/d in Saudi and 1.1 mb/d in the UAE, plus 0.6 mb/d in Iraq and 0.4 mb/d in Kuwait.

That headline is misleading because a chunk of the spare sits in producers whose export routes are still trapped behind the chokepoint.

In other words, paper market participants can point to spare capacity; the physical market only cares about spare capacity that can reach water and eventually customers.

The first-pass physical balance is this:

• Gross crude/condensate loss: about 14.5 mb/d.

• Less Saudi/UAE bypass headroom: about 2.6 mb/d.

• Less fast non-Hormuz response from elsewhere: call it 0.5–1.0 mb/d over a quarter.

Net Physical Deficit: After accounting for pipeline diversions and emergency releases, the market still faces a structural deficit of 11 to 12 mb/d. This does not take into considerations damages to any Gulf infrastructure that won’t come back online for weeks, months, or years.

Refineries in Asia (which take 80% of Hormuz flows) face an existential dry out. To avoid the massive costs of a hard refinery shutdown, these buyers will pay any price for the few barrels still on the water (West African, North Sea, or US WTI).

Below is a chart of Asian floating storage, showing a peak to trough drawdown of around 70%.

Other regions show less dramatic but equally concerning drawdowns. The Middle East reveals trapped supply; Europe is not depleted like Asia, but it is also not flush. The U.S. Gulf Coast is acting as a pressure valve, but not a large enough one. The bigger issue is that the system is fragmented, unbalanced, and barrels are not where they are needed when they are needed.

A few days ago, the economist Paul Krugman displayed his toy model here. Unfortunately, he is solving for the wrong answer of global supply versus global demand.

Standard elasticity models like Krugman’s suggest oil prices should rise by 60–70% in response to a disruption of this magnitude. But those models assume a globally integrated market where barrels are instantly fungible.

In a physical dislocation, the relevant elasticity is not global demand elasticity; it is the elasticity of deliverable supply at time T+X.

A barrel that arrives in 40-days does not satisfy today’s price at time T. This creates elasticity collapse, pushing it to the lower end of Krugman’s estimates because the system is fragmented by geography, constrained by transit times, and bottlenecked by distillate production.

The Paper Price Model

Additional information can be found using spread data from live markets instead of egghead toy models.

Mainstream analysis about what is called backwardation in commodity markets, where near prices are higher today than far prices are tomorrow, suggests that markets will normalize in the future. Nothing to worry about.

This would be the inappropriate framing for physical markets.

Below are three price charts of the June 2026, December 2026, and January 2027 Brent futures contracts.

Below is a table that summarizes the spreads among the contracts above between December 31, 2025 (before oil went bananas), April 6, 2026 (the day before the 🌮), and this morning April 8, 2026.

The spreads exploded from near zero or negative at the start of the calendar year until the taco and have given back some of their differentials.

This violent backwardation is a flashing red light indicating that the physical dry-out is hitting the core pricing mechanisms. A barrel in today is worth nearly $10 more than a barrel in June simply because it exists.

None of this is controversial to oil traders. But…and there is always a but…

The Denial is in the Back-End

• The December 2026 - December 2027 spread (COZ6COZ7) is only trading at $4.74. This is the evidence of the disbelief mentioned earlier. While the front end is vertical, the back end assumes a rapid “V-shaped” recovery.

• It ignores the 900-day refill cycle required to fix the -1.8-billion-barrel hole.

• The market is pricing the end of the war, but it is not yet pricing the replenishment of the global tank.

The Inventory Math Conflict: To remediate a June-end loss of 1.8 billion barrels, the market needs a surplus of +2 million barrels per day for 900 days.

• Professional forecasts (like the EIA) only project a surplus of 3.0 mb/d starting in 2027 after transit resumes. This means the remediation would take nearly 600 days (until mid-2028) to return to pre-war inventory levels.

• The spread between December 2026 and December 2027 is currently too thin. It assumes a rapid return to prewar days that is physically impossible given the current movements and the tank refill requirements that grow by the day.

• If the inventory math is correct - that -1.8 billion barrels are gone, then the December 2027 barrel is being vastly underpriced by a market that still hasn’t factored in the 900-day refill cycle required to reach equilibrium.

The Physical Price Model

I model spot physical Brent as a function of the effective shortage that remains after accounting for bypass capacity, non-Hormuz replacement supply, and the shrinking ability of inventories and floating storage to absorb the disruption.

The model is deliberately simple. It starts with a gross net shortfall of roughly 11 mb/d after accounting for Gulf bypass capacity and fast non-Hormuz replacement supply. It then subtracts the market’s shrinking ability to absorb the shock through inventories, floating storage, and rerouting.

• This produces an effective shortage of 7.5% of world demand by end-April, 9.0% by end-May, and 10.5% by end-June.

• Applying a short-run prompt-market elasticity of 0.06 to a pre-war Brent anchor of $72 yields implied physical clearing levels of $162, $180, and $198, respectively.

The point estimates are listed on the far-right column above. The range distribution looks like this:

• End-April: $155–$170/bbl.

• End-May: $170–$190/bbl.

• End-June: $185–$210/bbl.

Why the equilibrium rises month by month

By end-April, the market is still living partly off pre-war cargoes already in transit, remaining commercial inventories, floating storage draw, and disbelief. Asia is already visibly depleted on float, and Middle East barrels are increasingly irrelevant to prompt clearing because they are trapped or delayed. Thus, the market must pay enough to pull Atlantic Basin barrels east, preserve refinery incentives, start rationing lower-value demand. That gets you into the low/mid-160s for physical Brent.

By end-May, the problem is no longer interruption risk. It is a realized shortage with cumulative stock draw. At that point, Asia’s buffer is largely gone, West Africa has been leaned on harder, Europe’s modest cushion matters less, North Sea and USGC become the marginal export pools, distillate scarcity becomes more acute.

Thus, the market must pay a higher price to force more aggressive demand destruction, stronger eastward reallocation of Atlantic barrels, continued refinery run maximization despite freight and timing stress. That moves equilibrium into the high-170s / around $180.

By end-June, if Hormuz is still closed, the system is deep into the cumulative deficit phase. This is where the market is no longer just pricing scarcity. It is pricing: depleted usable inventories, chronic distillate stress, shrinking optionality, rising value of prompt cargo timing, and the reality that replacement supply cannot be conjured quickly enough.

At that point, physical Brent must ration demand much more brutally. That is why end - June clearing moves toward $200.

Concluding Remarks

• Physical markets are distinct from paper markets.

• The normal behavior of paper markets, despite their backwardation, does not reflect the physical reality of the physical Brent dislocation.

• Thus, paper markets do not express the gaping hole in physical markets that will continue to grow despite a ceasefire, at least until the aggravated parties come to a durable and enforceable political solution AND results in timely oil flows.

• The physical Brent price projections are what they are – projections – which are contingent on multiple unknowable vectors. However, they can serve as a guide to manage expectations of political noise.

• In time, physical markets are destiny, as paper markets are legally required to settle at physical spot, not the other way around.

The meme of nothing ever happens sent home Mike Tyson’s message, in real time, that everyone has a plan until they get punched in the face.

Pinebrook got punched in the face.

Nothing ever happens refers to the idea that geopolitical headlines, such as the U.S. military buildup in the middle east, is noise with little signal that should be ignored. This noise is amplified by a media-obsessed U.S. president in the form of Donald Trump.

This time proved different, as something did happen in the form of kinetic action and actual bomb dropping in Iran. Then again, there was a 12-day air war with Iran last year.

Wash, rinse, repeat, init?

• Le marché certainly priced it as such on Monday, March 2nd. Some undeforming long risk was kicked to the curb (KRE, AIT, WNC, ES-futures) but tragically, long/short pair trades were closed out (EFA/EEM), as well as some short equity hedges (IWM).

• The head fake with a punch to the face came on March 3rd, when three core long risk positions in TSM, EWY, and DXJ were torched and subsequently put out to pasture at a loss (but also after large previous gains in the same names).

• Seeing the carnage after something did happen, the degrossing of risk started on March 5^th, with subsequent liquidations on March 9^th, 13^th, and the final puke on the 26^th.

• About 15% AUM was deployed across risk assets that were expected to perform well under an environment of commodity scarcity and supply choke points. While those positions did outperform the broader market, they still resulted in a small loss that contributed -.23% in negative performance attribution to the book.

• Fortunately, the short put-spread on gold miners played out and went to zero, which resulted in profits. The expression of the thesis was grossly inefficient however, as the long put also went to zero after having been purchased dearly due to high implied volatility levels. Nevertheless, cash is green and the net PNL contribution was positive at 37-basis points.

• On the rates side, we swung for two and got two base hits, having shorted U.S. 10’s (ZN) in early March and then taking the other side of the short end in late March with a long in 2’s (ZT).

Disaggregating the portfolio returns and ranking them by source reveals the following:

• 2.41% in commodities.

• 56-basis points from rates.

• 40-basis points from options.

• -92-basis points from equities.

The process of degrossing was too slow, and re-engaging on the short side did not happen due to risk aversion in the context of a headline-driven market that could blow short positions out of the water.

Warren Buffett’s first rule of portfolio management is don’t lose money. His second rule is respecting the first rule.

The month of March was an exercise in frustration of the above.

If the future evolution of the economy is anywhere near what these pages expect, we are in the early days of a massive opportunity set for active management and for taking risk on both the long and the short side.

Volatility will increase and tails will become wider as both sides in the Iran conflict chose to escalate before reaching an off-ramp.

There is money to be made in this sequence of events.

Read more

For years the resilience of the U.S. economy has been the envy of the world, weathering crisis after crisis as if they were life annoyances instead of existential threats to the business cycle.

Outside of a policy choice to induce a mini (but deep) recession in 2020, the U.S. economy has been in growth mode since 2009, in one of the longest expansions in post-World War II history.

The post-Covid soft landing was the capstone. One can quibble about the when, but ultimately Chairman Powell did put on his big boy pants and rose to the occasion of his personal Volker moment.

Once “transitory” became a four-letter word, Powell shot it in the head:

• Inflation fell from a peak of 5.6% YoY in February of 2022 to 2.61% YoY in April of 2025, just before the tariff war.

• The labor market was cooled from a generational low of 3.5% in September 2022 to its current 4.4% level without crashing it, and wages embarked on a multi-year descent from inflationary levels to disinflationary ones.

The U.S. economy appeared to be made of Teflon, and no level of policy mismanagement or exogenous shocks seemed capable of breaking it. Number go up.

“Nothing Stops This Train”.

• The oil supply shock, and all its attendant second and third order effects on both upstream and downstream suppliers, is going to test this thesis once again.

• Evolutions in the U.S. economy (no wage-price spiral, less energy intensity, and energy independence) will insulate it from the worst outcomes and likely avoid a repeat of the 1970’s.

• However, the inbound inflation and the accompanying demand destruction will put the Fed in an uncomfortable spot that will become an existential threat to the business cycle.

• This is not the collapse - but it is the first real test of the post-Covid resilience thesis.

Last week, the OECD released its economic outlook, which includes its now revised 2026 U.S. growth and inflation projections for 2026. Eyebrows perked up, mouths opened wide, and pearls were clutched.

• U.S. headline inflation went up by 1.2% to 4.2%. 😱

• U.S. core inflation remained flat. 🧐

• U.S. real growth was downgraded by 30-basis points to 2%. 😠

This is the noise, and it is baked in the cake and priced. Markets don’t care and neither should you.

The signal is in the Fed’s reaction function to the evolution of the economy, and its forward prospects, at a future point time from today at T + (when).

Will they or won’t they, is the key question that is most top of mind for investors right now. But the action in question is not “will the FOMC look through an inflationary supply shock and not raise interest rates”?

Of course they will. The above is a given and is first order thinking. It’s the known-known, if you will.

The alpha is in how far and for how long will they look past the supply shock. Every system has its breaking points around its nodes of fragility, as outlined in discussions around supply bottle necks and choke points.

Thus, we must solve for two unknowns:

• The future state of the economy, as defined by the growth and inflation matrix, along with the most likely forwarddistributional path of those two variables.

• The reaction function of the FOMC as it seeks to balance its dual mandate.

Let’s get after it.

The Timeline of the Squeeze: The Kinetic Reality

The starting point of this analysis is that the Strait of Hormuz is effectively closed until the end of June or even July.

• Watch what they do, not what they say: Thousands of U.S. troops are enroute to the military theater centered around Iran. The latest deployments and their required logistical support will take another few weeks. We are now in late April.

• Focus on sequential timelines: More threats → actual kinetic action → more negotiations that narrow the spread between competing strategic goals. We are now in May, or even June if the scope of the conflict is broadened.

• Wash rinse and repeat.

• At some point, the political and economic costs in the U.S., and the military costs in Iran, will force a negotiated settlement with some propagandized label of success for both parties and the oil will flow again, if not in fact at least in negotiated theory.

• We are now in late June or early July, before America’s 250^th birthday on July 4^th, which happens to be the weekend holiday with the most miles driven, which highlights the costs of gasoline and the war (and perhaps even a deeper questioning of the conflict).

• And now the real work of re-starting the economy will begin. Upstream suppliers will need four to six weeks to come back online, and downstream will require another four to six as well. Q3 is over and Q4 is upon us.

Pinebrook takes the OECD economic update at face value, except on its expectation for the energy disruption to normalize by mid-2026. This is where Pinebrook and the OECD part ways.

Markets don’t wait and mid-2026 is discounted and already priced. Markets are grappling with the distributional path of H2 2026.

By simply pushing out the recovery timeframe by one quarter, the OECD’s baseline expectations go in the dumpster fire.

Thus, a temporary price shock becomes a multi-quarter inflation and income shock.

The Inflation Tax and the Mechanics of Demand Destruction

Unlike with the Covid Pandemic, the transmission mechanism today will not be through an increase in nominal wages, but rather the compression of real disposible income.

Higher energy and input costs raise prices across the system. But without offsetting wage growth, the result is simple: households become poorer in real terms. Demand and spending fall.

Energy, in this context, functions as a regressive tax. Lower and middle-income households—those with the highest marginal propensity to consume - absorb the largest hit. The result is not inflationary overheating like in the pandemic but rather demand destruction.

The current 50% spike in crude oil prices is a regressive $150 billion tax levied directly on the U.S. consumer.

The immediate impact of gasoline is felt at the lower 60% of the income distribution. Unlike the upper cohort of the K-shaped consumer market, these households operate on thin margins.

When the cost of a commute spikes, the first casualties are small luxuries – expensive coffee, dining out, streaming services, and discretionary retail.

This is the disposable income cliff, where nominal spending may appear stable due to higher gas prices, but real volumes collapse.

Based on the OECD’s energy shock data (+50% oil price) and Pinebrook’s Hormuz closure timeline (through June/July), here is an estimated energy tax calculation and the impact on real demand and GDP growth.

• Energy Intensity of Consumption: Energy (gasoline, electricity, heating) typically accounts for ~4-5% of the average U.S. consumer basket, but for the lower-income half of the K-shaped labor market, it can exceed 8-10%.

• This shifts an immediate $400–$600 billion in household cash flows from discretionary consumption into energy expenditures.

• A 50% sustained increase in energy prices (OECD assumption) translates to a direct 1% to 1.5% hit to total real disposable income across the aggregate consumer base.

• Given that Personal Consumption Expenditures (PCE) drive ~68% of U.S. GDP, a 1% decline in real spending translates into roughly .70% of GDP drag before second round effects.

• If the Strait remains closed through June/July, this demand destruction shaves 50 – 100 basis points off the old H1 growth projection of zero.

• This puts additional pressure on demand destruction by the policy choice to shrink the labor market via changes to immigration policy.

Now, keep in mind the above does not happen in a vacuum. The Ai capex spend is a thing and it is not going away soon. Hyper-scaler Capex is projected at $650bn or 2% of GDP, which has been the primary growth engine in this stage of the cycle and has provided a steady 2.0% growth tailwind.

The Ai capex cycle offsets roughly 100 - 150bps of the energy-driven demand drag, preventing a full recession.

Thus, the economy will experience a balancing act between an energy tax and a structural Ai floor, in an economic context different from the pandemic experience.

However, an equilibrium will not be reached until year end, as the effects of the energy tax are mostly immediate (at the gas pump) while the Ai cycle doesn’t begin to accelerate until Q3 2026 as firms push for more Ai adoption to offset the energy tax.

Mapping the Inflation Trajectory: The Pandemic Mirror and the 2023 Cliff

The inflation trajectory of the Hormuz shock will be more front-loaded and volatile than the pandemic, but also with a faster potential deceleration - provided the abundance regime is not structurally broken.

Unlike 2021, where consumers were flush with cash, the 2026 shock hits a K-shaped labor market with zero net new job growth for over a year. This means the inflation rate will be capped by a collapse in aggregate demand, versus being fueled by excess demand like during the pandemic.

While the pandemic featured a slow-building, multi-year inflationary climb fueled by gargantuan fiscal stimulus and broken global plumbing, the current inflation spike will be almost immediate due to the 50% surge in crude oil prices since the conflict’s onset.

In 2021, the Fed was behind the curve. In 2026, the Fed is in a wait and see mode with restored credibility, which helps keep long-term inflation expectations anchored, unlike the immediate post pandemic experience where Fed credibility came into question for the first time in 40 years.

One approach to mapping out the inflationary sequencing is to overlay the parabolic inflation rates of March - September 2021 onto our current trajectory, then apply the September - December 2023 inflation cliff as our Q4 proxy.

Easy peasy, cut ‘n paste init?

Unfortunately, no. Adjustments need to be made to account for the OECD’s projection that supply chains are running below 85% capacity, and thus inflation will be higher in the short term before a supply side flush starting in late Q4 2026.

In table form, the distributional path looks like this.

In effect, a modified accelerated, deeper, and compressed timeline of the pandemic supply shock experience.

Labor Market Hoarding and Breaking Bad with the Sahm Rule

Read more

Closing March 23, 2026 at 4407.18, this represents a -18.64% corrective move, with -12.19% of that happening over the past week alone.

This is a classic corrective flush, almost tagging the 200-day moving average of 4091.76, which was stick-saved by a Monday morning post on Truth Social by Donald Trump announcing a pause to his bombing plans of Iranian infrastructure.

The March 23, 2026, intra-day low was 4099.17, for a peak to trough drawdown of -24.33%.

A tag of the 200dma and a breaking of the 20% threshold for a bear market, with a subsequent bounce, presents traders with a conundrum.

Is this a washout and durable rebound or a headline-driven bounce fueled by short covering?

These pages start with the view that gold is in a secular bull market.

• Pinebrook got long gold futures back on July 22, 2025. The position was oversized which resulted in a stop-out on August 7, 2025, at a small loss of 1.8% on margin capital.

• Position size was recalibrated and another long was established on August 8, 2025. The position was held until October 9, 2025, for a realized gain of 362.33% on margin capital.

• The bullish gold thesis was discussed on August 1, 2025.

• On September 5, 2026, a long position was initiated on the junior gold miner ETF, GDXJ, which was closed out on October 9, 2025, for a 19.86% return on invested capital.

• The note supporting the long miners trade can be found here.

We were admittedly too early to take the other side on October 13, 2025 by going short the junior miners and on October 17, 2025 by going short gold futures.

We got rinsed with a 9.05% loss on the miners and the gold future shorts cost us about half of our gains from the prior gold futures long.

Trading is hard, and when you burn your hand on the stove, you don’t forget that its hot!

• And gold was indeed 🔥, going parabolic as it became 78.81% overbought relative to the S&P500 on a rolling 1-year average going back to November 2005.

• This represented 3-standard deviations of overbaughtness relative to the index, which exceeded even the dark days of the global financial crisis at 63.10%.

Crazy doesn’t even begin to describe this chart. 👇

For PNL context, profits were generated from shorting silver via SLV options on January 15, 2026 and then by shorting futures contracts (102% return on margin for one sleeve and a 300.5% return on another) on January 16, 2026 and again on January 27, 2026, which provided the PNL leeway to re-engage gold on the short side.

For new readers, when the SLV ETF peaked on January 29, 2026, it was 261.61% overbought relative to the S&P500, representing over 7-standard deviations! Not a bu-bu-bu-bubble. 🫧

Being risk aware and not forgetting that the gold stove was still 🔥, a short was taken on gold miners on February 2, 2026, by shorting call spreads and purchasing a deep-out-of -the money put option on the GDX and GDXJ ETFs.

All the options expired worthless on March 20, 2026, which generated a profit on the short call spread and a loss on the long put. The net result was a modest profit.

The trade was inefficient due to the high cost of implied volatility in the underlying commodity, which drove volatility in the miners. The return was a pittance compared with what could have been earned by simply shorting the miners or the futures, and sizing correctly for risk management.

The question for these pages now is, is it safe to get back in the pool with the gold sharks?

Let’s unpack this.

We start with updating the GLD-SPX chart listed above.

Despite the corrective pullback, the GLD ETF remains 1-standard deviation overbought relative to the S&P500.

It is cheaper, but not that much cheaper. Charts like this are not predictive. Expensive can get more expensive if le marché deems that to be the path of least resistance.

More buyers than sellers init?

Below is an updated table from a October 20, 2025 note showing post-2006 drawdowns. In addition, the corresponding drawdowns are shown for the two dominant gold miner ETFs, GDX and GDXJ.

So far, this correction is very mid and unexciting.

• One could make the argument that the current correction of biggest bull market of this generation is bounded by its strength. The risk is the proverbial knife catch.

• Once could also make the argument that a run up characterized by 3-standards deviations requires a lot more air to come out of the bubble. The risk is missing out on a counter trend face ripping rally.

These two arguments are both valid and worthless at the same time because we need to solve for distributional outcomes and path dependencies, not averages.

First, we must acknowledge that the counter trend has already happened.

• Gold peaked on January 28th.

• It made a violent local bottom on February 5th, for a -11.78% correction.

• Most of this was made up by March 2nd, for a 11.36% comeback from the corrective low.

• As of March 23rd, gold is -17.19% from the counter trend rally peak.

• The trend is broken.

Nice charting and technical analysis.

Second, the narrative soup to describe the price action suggests is not going to go away.

• The gold market peaked before the war. Markets always look forward and priced in the dollar pop resulting from a geopolitical risk-off. Buy the rumor sell the fact.

• Others did not get the memo and fought the tape, until they were disabused of their optimism by an actual invasion and escalation. Recall Pinebrook was short, albeit for a while, painfully so.

• Global risk-off and flight to quality will keep the dollar bid until the market front runs a political solution, however perfect or imperfect it may be, provided it gets physical oil flowing again through the Strait of Hormuz.

• The risk-off has led to a deleveraging and degrossing of risk assets. When financial conditions tighten, you sell what you can and have made money in to fund margin calls and shore up balance sheets. It’s at this point the stories become worthless.

• Rumor has it that Gulf central banks are unloading gold to meet commitments in the absence of oil revenues. Buy the rumor sell the fact.

Given the above, it is fair to assume that the rumor of continued selling during a cash crunch and tightening financial conditions will carry on until a political solution is forged for mutually agreed oil flow to resume.

But we need another tool to map outcomes and dependencies.

Read more

Since late February, markets have entered a rates-volatility regime characterized by rising nominal yields, rising real yields, rising break-evens, and modest term premium expansion, with the MOVE index breaking higher but credit spreads still broadly contained outside the lowest-quality tail.

That said, spreads have begun to widen directionally across the stack, with the most pronounced stress emerging in lower-quality credits. The trend matters more than the level.

This is not a recession signal. It is a repricing of risk under tighter financial conditions.

Equity price action is consistent with a crowded cyclical/breadth unwind rather than a recession signal: broad industrials, materials, and equal-weight exposures have been liquidated, while energy remains resilient and washed-out tech has stabilized.

The market is therefore pricing a supply shock and tighter financial conditions simultaneously, but not yet a macro breakdown. Leadership is likely to remain narrow and selective until either rates volatility subsides or credit stress broadens.

• The 493 rotation trades that worked best in January and February got torched in the first two weeks of March. XLI, XLB, and RSP.

• Tech names (QQQ, MAG7, software) that got rinsed in January and/or February suffered least in the first two weeks of March.

As of close March 19, 2026

Trading the Industrial Aftershocks

Last week’s Signal & Noise Filter framed the new trilemma clearly enough:

• Job’s Day noise.

• Geopolitical shock.

• Stagflationary supply shock.

The subsequent U.S. Economic Growth Update went deeper into the macro plumbing and made the more important point: the real risk is not simply weaker GDP in H1, but the possibility that persistent supply instability begins to impair productivity and chips away at the post-pandemic abundance regime.

This note is about the portfolio expression of that view.

The trades have already been put on as mentioned on Monday. The purpose of this note is to explain the logic underneath those positions and, more importantly, to tie them into the broader cross-asset signals that markets are currently sending.

• This is not a recession trade.

• This is not a broad cyclical reflation trade.

• It is a supply-shock inflation-volatility trade expressed through the industrial aftershocks of a prolonged disruption.

• A disruption that has created aftershocks, each with second and third order effects, that are baked in the cake and will manifest themselves in the future regardless of when the war is ended.

No one knows how long hostilities will last and when a negotiated political settlement is forged between the U.S. government and by whatever is left of the Iranian one.

But we don’t need to know….

Markets do not need a full oil supply collapse to spike prices, they only need fragility. Three structural facts matter.

• The oil market has almost no spare capacity. The result is a market that can move non-linearly, and you don’t need a catastrophic disruption to get extreme price moves.

• Supply growth has been structurally weak. Because of this, global supply growth is slow even when prices rise. When a shock happens, the market cannot quickly increase production to offset it.

• Oil shocks propagate through the entire cost structure. Oil is a central input into the global economy. It affects everything….

These structural factors lead to outsized macro impacts because of the fragility of the system, where price spikes become convex.

Even if the war ends tomorrow, inventories have already shifted, shipping routes have changed, and supply chains must rebalance.

• Thus, the real investing question isn’t how long the war lasts, but “which supply chains are already distressed enough to cause structural (not temporary) shortages”.

• The answer lies not in the obvious commodities themselves, but in the industrial aftershocks that ripple through supply chains.

The Nature of Supply Shocks

Markets often respond to geopolitical disruptions by immediately bidding up the most obvious commodity.

→ Oil rallies → Energy equities rally → Commentary focuses on the price of crude.

But history shows that the largest equity returns rarely occur in the first commodity affected by the shock. They occur in the industrial bottlenecks downstream of that commodity.

Commodity cycles follow a predictable pattern:

• Most investors stop at Stage 1.

• The opportunity usually lies in Stages 2-4.

The Supply Shock Transmission Chain

To understand how the current disruption propagates through the economy, we must map the industrial chain.

The war-driven supply shock begins with energy and transportation disruption but quickly spreads through the petrochemical and fertilizer systems.

• Geopolitical conflict → Energy supply disruption.

• Refining & petrochemical stress → Sulfur & chemical feedstock shortages.

• Fertilizer & industrial input shortages → Energy substitution and biofuel demand.

This sequence describes the industrial aftershock mechanism. Importantly, each stage produces a different set of sector winners. Below is a schematic diagram of the supply shock tree.

The Hidden Bottlenecks

In commodity cycles, the bottleneck asset outperforms the commodity itself. Some historical examples include:

• Fracking boom → sand companies

• Lithium boom → spodumene processors

• Shale boom → pipeline MLPs.

Thus, one of the more interesting observations emerging from this analysis is that the critical bottlenecks may not be crude oil itself. Instead, it appears to lie deeper in the petrochemical chain.

• Sulfur is the hidden hinge. Sulfur production is closely tied to oil and gas refining / processing as a byproduct. If refining or gas processing is disrupted, sulfur availability tightens. Sulfur is the key feedstock used to produce sulfuric acid.

• Sulfuric acid is essential for phosphate fertilizers, copper and uranium mining, and numerous chemical processes.

• Phosphate fertilizers are highly exposed because they need sulfur / sulfuric acid. Phosphate producers can be both victims of sulfur inflation and beneficiaries of higher finished fertilizer prices. The trade works best where the producer has better asset position, procurement, and ability to pass through costs.

• Nitrogen fertilizers do not depend on sulfur in the same direct way phosphate does, but it often works as a sympathy / substitution / broader ag-input tightness trade.

• In uranium mining (and mining in general), sulfuric acid is valued for its leaching properties and separating uranium from the ore.

Finally, sulfuric acid is unusual in that it is difficult to transport long distances, it is a dangerous chemical, and storage is limited. The market is thus regional and extremely tight. This amplifies shortages quickly.

This is what differentiates a true bottleneck from a commodity: it is not globally fungible, not easily scalable, and not easily substituted.

Thus, the winners are not “chemicals” in general. They are the names with lower-cost feedstock, geographic insulation from Gulf feedstock disruption, and enough market power to pass through costs. Investors should not simply chase chemical beta.

In other words, more regional feedstock advantage and market-share / spread improvement than pure sulfur exposure.

• Chemtrade (TSX: CHE.UN) is one of the cleanest public expressions the sulfur trade bottleneck. Chemtrade is one of North America’s largest suppliers of industrial sulfuric and merchant acid. If merchant acid stays tight, Chemtrade is a direct pricing-power expression of the shortage. It is closer to the bottleneck than broad commodity names.

• Ecovyst (ECVT) is the largest sulfuric acid regenerator in North America and a leading North American producer of virgin sulfuric acid.

• In the world of phosphate fertilizers, Mosaic (MOS) is the obvious listed name here. Mosaic recently extended phosphate production curtailments in Brazil due to the sharp increase in sulfur prices.

• CF Industries (CF) is a less pure sulfuric-acid exposure than MOS, but if global fertilizer balances tighten broadly its products become a viable substitute.

• Intrepid Potash (IPI) makes Intrepid Trio, a custom blend for row crops nutrition consisting of potassium, magnesium, and sulfur.

• An indirect beneficiary of high sulfuric acid prices is the Sprott Physical Uranium Trust.

In the world of petrochemicals, Asian petrochemicals are vulnerable if Gulf feedstocks and refining throughput are disrupted. The better-positioned public equities are those with North American feedstock flexibility / advantage:

• Dow (DOW) has feedstock flexibility and uses financial and physical hedging, though it also warns it cannot always immediately pass through higher feedstock and energy costs.

• LyondellBasell (LYB) has an olefins/polyolefins footprint, substantial liquidity, and advantaged ethylene position in North America.

American Edge

The U.S. is no longer the 1970s oil importer. It is now a major exporter of hydrocarbons and refined products, which hardens its supply chains as well as making it a beneficiary of the FX transmission channel.

• The U.S. exports large volumes of crude oil, LNG, refined petroleum products (diesel, gasoline, jet fuel), and petrochemicals. That means when global energy prices rise foreign buyers must obtain USD to purchase those exports.

• The petrodollar flow now works differently. Historically (1970s–2000s), an oil price spike led to U.S. trade deficit widening → dollars flow abroad → USD weakens.

• Thus, the mechanism is more balanced. An oil price spike today can lead to higher U.S. export revenues → improved U.S. energy trade balance → stronger USD demand. Unlike the 1970’s, the dollar strengthens or stay firm during an energy shock.

A big part of U.S. energy exports is not just crude but refined fuels. Diesel, jet fuel, gasoline, and petrochemical feedstocks. In supply disruptions, these exports often surge because U.S. refineries have scale, feedstock access, global distribution networks via American ports and inland waterways.

The United States is one of the most, if not the most, geographically advantaged nations on the planet.

Among these refined fuels is diesel. Diesel is the industrial fuel of the global economy. Diesel powers trucking, shipping, rail, mining equipment, construction machinery, farm equipment, backup power, and industrial generators. It is the fuel of the physical supply chain.

When diesel markets tighten, it means the real economy is short an essential input.

These are companies where diesel crack spreads drive earnings.

• Valero Energy (VLO)

• Marathon Petroleum (MPC)

• Phillips 66 (PSX)

There are second-order beneficiaries of diesel market tightening.

• Darling Ingredients (DAR) supplies feedstock for renewable diesel. If petroleum diesel prices spike renewable diesel margins expand.

• Neste (Neste Oyj) is one of the largest renewable diesel producers globally.

• Peabody Energy (BTU) markets low sulfur coal, primarily for use by electric companies.

Scarcity trades only work for producers, not users.

This is a critical distinction. Within materials/industrials there are two types of firms:

• Input producers such as fertilizer companies, mining companies, and chemical producers. These can benefit from scarcity.

• Input consumers such as construction firms, machinery manufacturers, and transportation companies. These get crushed because their costs rise faster than prices.

This is why industrials can underperform in supply shocks. Many industrial companies operate on fixed-price contracts. At the same time, they are capital intensive with high fixed costs, as well as energy intensive. If input costs surge, they cannot immediately pass those costs on. Thus, their margins compress.

Portfolio Implementation

The reason to lean into this trade now is not simply the geopolitical shock. It is the interaction between that shock and tightening financial conditions.

Real rates are rising, credit is deteriorating at the margin, and broad cyclicals are being de-risked. This forces markets to move away from broad beta and toward more selective expressions of scarcity.

That is the transition we are now seeing.

Thus, earlier this week Pinebrook initiated positions designed to capture these downstream supply shocks in the context of tightening financial conditions.

• The positions were implemented through sector ETFs rather than individual equities to reduce company-specific risk and maintain focus on the macro regime.

• This structure reflects Pinebrook’s core investment philosophy and edge in identifying macro regimes and sectoral implications, not in selecting individual companies.

• The objective is to isolate macro factor exposure rather than company-specific outcomes.

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• The labor market would tighten (lower U3) without triggering a wage-driven inflationary impulse due to the ongoing productivity boom and the remaining slack in the under-30 age cohort of the labor market.

• The Administration’s immigration policies would reduce aggregate consumer spending and lower GDP output between 75-basis points and 1%, further putting a lid on labor market-driven wage pressures.

• The gargantuan AI spend cycle would be net supportive and additive to growth, resulting in a goldilocks environment of less inflation by year-end and a continuation of the growth cycle.

A few days ago, it was observed that the K-shaped nature of aggregate labor income distribution and the nature of higher oil prices acting as a regressive consumption tax that lowers discretionary spending, would dampen any inflationary impulse from temporary higher oil prices.

Today, increasing spot inflation mixed with lower aggregate demand brings back 2022 vibes.

Recall the defining macroeconomic events of 2022:

• The largest oil supply shock since the 1970’s, resulting in the largest price shock since the late 1980’s.

• In response to being late to the inflationary trade, the Powell Fed embarked on its most aggressive hiking cycle since Volker and yield curve maxxed until inversion.

• Two back-to-back quarters of negative GDP growth in 2022 (one revised upward, one still negative) but no technical NBER recession that everyone was sure would come.

• A kinetic geopolitical event between Russia and Ukraine.

• For the full year 2022, the U.S. economy expanded by 2.1%. This growth was primarily driven by consumer spending, exports, and private inventory investment, which helped offset a decrease in residential fixed investment and federal government spending.

• A white-hot labor market that saw the U3 unemployment rate fall from 4.0% to 3.5%, and average 3.64% for the year was foundational to the above.

One quarter into 2026, and the U.S. economy is now faced with another set of supply and price shocks, and a labor market that while shrinking and mechanically lowering U3, still hasn’t produced any net new jobs in over a year.

Is it so over? Let’s Dive in.

The Strait of Hormuz shock adds a new layer of risk to the economic backdrop for H1 2026. If supply chain disruptions materially constrain energy, chemical, and other manufacturing inputs as they did in 2022, two back-to-back quarters of negative GDP go from a left tail risk to a base case.

• Recall, 2026 Q1 GDP started on the soft side due to the lagged effects of the government shutdown and subsequent layoffs in Q4 2025.

• Prior to the Hormuz shock, soft data was pointing towards a mid-quarter cyclical acceleration.

The current shock will most likely drift Q1 GDP closer to zero but likely keep it positive because of the mid-quarter momentum.

• Higher commodity prices will directly and indirectly depress consumer spending (demand destruction).

• A resumption of government spending post-shutdown offers a modest offset.

• Even if unemployment doesn’t spike sharply, sluggish employment growth still reduces spending growth in the context of a price shock, which shows up as softer PCE (consumer expenditures, not the price index) when the BEA compiles quarterly GDP.

On the production side, business investment, production and inventories will be impacted.

• Disruptions in supply chains (e.g., due to energy/price shocks), force firms to produce less, and order fewer inputs.

• Business investment is also negatively impacted and contributes negatively to GDP as part of the investment component.

• If inventories shrink because firms sell stored goods without replacement, that also subtracts from GDP.

Mechanically, GDP growth = C + I + G + (X−M)

Q2 will simply be a larger, more leveraged version of this.

A baseline of 1-month of kinetic conflict takes the shock and disruptions into April. In a perfect world, it will still take months before capacity and activity come back online at the oil and refinery level, much less actual deliveries and distribution to end-producers.

Thus, the biggest issue after kinetic conflict ends is the normalization and sequencing road ahead.

The global supply chain faces a non-compressible, sequential recovery timeline. It is a biological restart for an industrial system, not a light switch.

• Port bottlenecks and backlogs will take approximately one week to work off, as an oil tanker needs to visit 2-3 ports to top-off 2 million in barrel capacity.

• Once the initial buffer of stored oil is shipped out, oilfields need to come back online. This process can take two weeks to revive pumping systems, pressure, and systems safety. Of course, this assumes there are no damages from military strikes, or shortages of spare replacement parts. Bruh. 👀

• After oilfields come back online, refineries need to come to life. This is not just an engineering and production effort. Refineries don’t fire up for a single tanker; they need visible tanker flow that results from a negotiated political settlement between the military antagonists. Another two weeks. ✅

• After basic refining (the first phase of distillation), oil products need to go to a steam cracker for additional processing to turn them into things like gasoline. Steam crackers need to wait for the refineries to be operational. Without a refined product as an input, there is nothing to “crack”. This can take four to six weeks.

In a normal to perfect scenario, the world is looking at eleven to twelve weeks petrol supply chain normalization after the cessation of hostilities. If repairs are required, or hostilities resume, the timeline shifts out.

Thus, Pinebrook is writing off Q2 GDP as a zero, and potentially negative.

The inflection from a mini-cyclical pop to recession-like GDP is not the main event; it misses the forest for the trees. GDP can be volatile in the short term and be fine in the longer term.

Productivity is going to take a hit.

• A GDP slowdown doesn’t automatically equal lower productivity - but in this context, it does.

• Productivity is generally measured as output per hour worked (or output per worker).

• A GDP slowdown can affect productivity in different ways depending on why output is falling and how labor hours respond.

• If output falls but hours worked fall proportionally, measured productivity may not change much.

• If output falls but hours worked do not fall proportionally, productivity declines because workers are producing less per hour.

In the case of an energy/price shock, the second scenario above is the likely result.

• A disruption in key manufacturing inputs (chemicals, metals, etc.) reduces available output as some factories cannot operate at full capacity due to missing inputs or high energy costs.

• Production becomes intermittent or staggered to conserve energy or inputs.

• Economies of scale go down, and marginal costs go up, which impacts productivity and shows up in profit margins.

Second order effects result from reallocations and inefficiencies.

• Firms may shift production or inputs in response to price shocks, which can be disruptive and reduce efficiency.

• Workers may be reassigned, idled, or underutilized while supply chain gaps persist.

• Higher energy prices can raise the cost of capital-intensive production, slowing investment in productivity-enhancing projects.

Public spending might maintain aggregate demand and keep the labor market from falling apart, but won’t make private manufacturing or services more efficient.

Recall, supply chain abundance is one of the three pillars (along with a mature labor market and a fixed investment boom) that underwrites the pro-cyclical productivity boom that was front run and called on these pages in 2024.

These three pillars led to lower inflation and anchored expectations and allowed fixed non-residential investment (hello, Ai CapEx) to expand without policy tightening.

• The above is best characterized as an abundance regime, and it was the first time since the late 90’s that the U.S. economy was in an abundance regime.

• Prior productivity booms were countercyclical, typically coming out of a recession after an employment extinction event, where productivity mechanically went up as firms did more with less people.

• The 2025 tariff trade policies strained supply chain abundance by raising prices and distorting supply lines, causing shifts and new bottlenecks.

• An energy supply shock adds further pressure to supply chain abundance, at a scale that ripples through the entire economic system.

The macroeconomic risk of 2026 is not a pullback in GDP or a one-off price shock. It is the growing risks to the post-pandemic abundance regime.

What happens when supply abundance disappears?

Instead of:

Demand ↑ → Investment ↑ → Productivity ↑

You get:

Demand ↑ → Input costs ↑ → Output constrained

Then three things happen.

• Production becomes constrained. Energy shocks, commodity shortages, or logistics disruptions mean factories are idle, production schedules break, and inventories fall. Workers can remain employed, but they produce less output per hour.

• Investment then becomes defensive. Instead of investing in capacity and efficiency, firms invest in resiliency. Inventory buffers, redundant suppliers, domestic reshoring, energy hedging. These are resilience investments, not efficiency investments.

• Inflation crowds out demand if energy/food/housing prices spike. Households must allocate more income to essentials. If essentials become expensive, then discretionary demand falls, investment falls, and productivity slows.

Without supply chain abundance, procyclical productivity shifts from optimization to constraint management; from efficiency maxxing to surviving supply shortages and their associated costs.

A supply shock doesn’t immediately kill pro-cyclical productivity. But over time, it can break the regime. There are two possible paths from here.

Temporary shock.

• Productivity dips.

• Supply chains normalize.

• Productivity resumes.

This is what happened after the pandemic.

Persistent supply instability.

• Investment shifts toward resilience.

• Costs rise structurally.

• Productivity regime ends.

That’s essentially what happened after 1973.

If the 2026 Hormuz supply chain disruption kills the abundance regime, the macro regime shifts down from its current 1990’s-style growth.

However, a 1970’s-style supply constrained economics is not the base case.

To get a 1970’s-style constraint economic regime requires the elements discussed in a recent note:

• A wage-price spiral emanating from union negotiated labor contracts.

• A non-credible monetary authority.

• A higher energy intensity for the economy than what we have now – effectively walking back the structure of the economy by 40-years.

In addition to the above, the service sector would need to shrink, and U.S. energy production would need to deteriorate.

What could happen, is a hybrid regime characterized by moderate inflation + weak productivity + volatile growth. Think less 70’s stagflation and more early 2010’s with an inflationary twist.

The natural question is, how long do we have before the supply shock starts to transition the economy into a regime discussed above?

The short answer is, it doesn’t take very long if the shock is persistent. The transition from a supply-abundance regime to a low productivity supply constrained economy historically happens over roughly 4–8 quarters, not decades.

The key is whether the shock is temporary price volatility or persistent supply instability.

Let’s walk through the mechanics.

• A supply shock must persist long enough to change firm behavior. Firms initially treat shocks as temporary. But once they conclude the shock is structural, they start changing supply chains, investment strategy, inventory policy, and pricing behavior.

• That behavioral shift is what creates a regime change. Historically, firms begin making those structural adjustments after about 12–18 months of instability.

The timeline of a regime shift.

Phase 1 — Immediate shock (0–3 months).

• Energy or supply disruption hits.

• Commodity prices spike.

• Production disruptions appear.

• Inventories begin falling.

• GDP growth slows.

Productivity usually does not collapse yet because firms still expect normalization. This is where we currently are in the early stage of a shock.

Phase 2 - Adjustment period (3–9 months)

Firms start realizing the shock may persist. You begin to see:

• Inventory hoarding.

• Supplier diversification.

• Longer delivery times.

• Defensive capex.

Productivity begins weakening because firms prioritize resilience over efficiency. GDP growth becomes volatile.

Phase 3 — Structural shift (9–24 months)

If supply instability continues, the economy transitions to a constrained regime.

• Structurally higher commodity prices.

• Lower productivity growth.

• Higher inflation volatility.

• Weaker investment efficiency.

This is when the economy starts losing abundance, and while it may not resemble that 70’s show, it does begin to look more…..European.🇪🇺

Now, historically, productivity slowdowns do not appear evenly across the economy. They propagate in a fairly consistent order because some sectors sit closer to physical supply chains and energy inputs than others.

Sectoral sequencing is one of the clearest early-warning signals that a supply-constraint regime is emerging. Below is the typical sequence seen during major supply shocks (1970s oil shocks, 2007–08 commodity shock, and to some extent the 2021 supply-chain crisis).

Transportation & Logistics (first sector to break)

This sector is usually the first sector productivity deteriorates because fuel is a dominant cost input. Shipping routes are sensitive to disruptions, and supply chain congestion creates idle labor and equipment.

When energy prices spike or shipping routes are disrupted, logistics companies often have

trucks waiting for loads, ships waiting in ports, and warehouses waiting for inputs. Workers remain employed, but throughput falls, so output per hour declines.

Typical signals

• Rising freight rates.

• Longer delivery times.

• Declining transport productivity.

• Historically this shows up 3–6 months after a supply shock begins.

Manufacturing (second stage)

Manufacturing is usually the second sector affected because it relies heavily on upstream inputs (chemicals, metals, energy) and production lines depend on synchronized supply chains. When inputs become scarce, production lines stop intermittently, workers wait for materials, and plants run below capacity. This creates a sharp drop in manufacturing output per worker.

Typical signals

• Falling capacity utilization.

• Rising inventories of unfinished goods.

• Declining manufacturing productivity.

• Historically this stage appears 6–12 months after the initial shock.

Construction (third stage)

Construction is extremely sensitive to energy costs and materials (steel, cement, lumber) and financing conditions. When commodity prices rise, projects are delayed, budgets are revised, labor is underutilized. Construction productivity therefore weakens as projects stretch out over longer timelines.

Typical signals

• Slower housing starts.

• Project delays.

• Rising building costs.

• This stage often occurs 9–15 months after the shock.

Consumer goods

After the upstream sectors weaken, the effects begin to hit consumer-facing industries. Retail and consumer goods firms experience rising inventory costs, weaker discretionary demand, and pressure to cut operating costs. Productivity falls because firms maintain staffing levels while sales growth slows.

This stage tends to appear 12–18 months into the cycle.

Services (last sector affected).

Services usually experience the slowest productivity adjustment because they are less dependent on physical supply chains. However, they are eventually affected through higher energy costs, slower consumer spending, and rising wage costs.

Why this sequence matters.

Because productivity is measured across the whole economy, early deterioration in logistics or manufacturing does not immediately show up in aggregate productivity statistics. Instead, it gradually spreads across sectors.

By the time aggregate productivity weakens significantly, the supply shock has usually been present for multiple quarters.

When logistics and manufacturing productivity weaken simultaneously, it often signals that the economy is moving from efficiency optimization toward constraint management.

Why Any of This Matters

Productivity determines how efficiently firms convert labor and capital and other resources into output.

• When productivity rises, unit costs fall and margins expand, supporting higher corporate earnings and equity valuations.

• When productivity weakens - particularly due to supply disruptions - costs per unit rise, margins come under pressure, and investors may reassess expected profitability, leading to lower valuations or multiple compression.

• High-productivity environments typically support higher multiples because margins are stable or rising.

• When productivity weakens, margins become more volatile, cost pressures increase, growth becomes less efficient, and investors demand a lower valuation multiple to compensate for increased risk.

• Periods of strong productivity growth - such as the late 1990s and the post pandemic era - are associated with rising corporate margins, high returns on capital, and expanding equity valuation multiples.

• Conversely, during supply-driven cost shocks (e.g., energy spikes or supply chain disruptions), margins often narrow and valuations reset lower.

Concluding Remarks

• Near zero GDP growth is a baseline expectation for Q1 2026, and potential negative for Q2 2026.

• Even an early end to hostilities kicks the timeline for supplies coming back online to Q3 2026.

• General price normalization (in core PCE terms, not oil) would follow over the following year, if not longer.

• If the supply shock persists for over 4-8 quarters, the supply abundance regime is at risk and comes into question.

• Should the above happen, the U.S. economy would likely not resemble that of the 1970s, but become more European in its productivity and growth outlook.

• A sectoral sequencing has been laid out to describe the evolution of the above.

• A structural productivity shift caused by an end to the abundance regime would lower corporate earnings, valuations and introduce volatility into financial markets.

• Navigating structural shifts in the economy will be a north star to managing risk in financial markets in 2026.

These are the three elements of the new Trilemma. The question for investors is, what do they mean and what is the anticipated Fed reaction function to each of them.

We start with the most benign leg of the bar stool, the Friday Job’s Day report.

• The February employment report was objectively bad, with the establishment survey delivering a -92K punch to the labor market narrative.

• Sprinkle in -69K in downward revisions to December and January, and you have the perfect recipe for a “recession-is-here” cocktail in the financial infotainment space.

This is the noise.

The informational edge is found by looking under the hood and distinguishing between a genuine cyclical turn and a statistical one-off. While the headline figures suggest the labor market got shot in the head, the reality is more likely a combination of methodological “voodonomics” and a weather-driven bullwhip.

The scale of the swing from January’s strength to February’s weakness is sus. We start with the birth-death model adjustments, which underwent a significant change in 2026.

Geek Note: the birth-death model does not concern itself with organic matters but rather with the opening and shuttering of a business.

The new model adjusted jobs by -61K in January and +90K in February.

• Compared to the averages of the prior two years, these adjustments were far more favorable to January and significantly less so for February.

• In plain English: the BLS “pulled forward” job growth into January that didn’t actually exist, only to “pay it back” in February.

Birth-death adjustments to Nonfarm Payrolls (NSA)

• The effect of this shift is most glaring in private education and healthcare, which have been the main engines of job growth in the past year. If we strip away the seasonal adjustment voodoo, both the “losses” in February and the “gains” in January were relatively small compared to historical norms.

• Furthermore, we had a literal labor market disturbance in the form of a Kaiser strike involving 33,000 employees in California and Hawaii. This strike has ended, and a “payback” print can be expected in the next report.

• Finally, the weather factor. A relatively balmy January followed by a frigid February created a seasonal whiplash for construction and leisure sectors.

When you combine methodological shifts with cold seasonals, you get a noisy data set that should be faded.

The household survey, which generates the U3 unemployment rate, confirms this.

• There was indeed moderate softening. Prime-age employment fell 0.1pp, and the U3 rate rose 12 bps to 4.44% (unrounded).

• However, the BLS introduced new population controls that lowered the weighting for prime-aged men and the white population while increasing it for older women and Asians.

• The result is the new population controls mechanically lower labor force participation and employment rates but have a de minimis effect on the unemployment rate itself.

• The signal is therefore not in the payrolls print, but in the policy-relevant household survey that generates the unemployment rate – which hardly moved.

The above is not sufficient to sway the FOMC and tip the scales of their policy stance.

The pink elephant in the room that is staring at the world is of course the joint U.S. and Israeli military incursion into Iran.

Given the oceans of digital ink that have been spilled on this topic over the past week, what you, dear reader, do not need is another non-expert predictive opinion.

What is needed is a framework for understanding the conflict. For this we turn to Carl von Clausewitz, the Prussian military theorist. In this framework, victory or defeat in war must be judged in the context of the stated political objectives.

In other words, is the use of force moving the needle to the stated political objectives?

The Trump administration has been remarkably consistent in its stated goals – which this writer finds shocking as policy coherence is not a brand fixture of this administration.

The stated goals - reiterated by Rubio, Hegseth, and Chair of the Joint Chiefs of Staff, Dan Caine – are as follows.

• Terminate the nuclear weapons program.

• Degrade the ballistic missile program and power projection capabilities which target neighboring Gulf states and U.S. military installations in those states.

• Degrade the Iranian Navy and secure the Strait of Hormuz for global commerce.

• This is not Iraq 2.0: Not a regime change war. There is no humanitarian effort to save anyone. This is not an exercise in nation building or installing a new political system.

• Trumps desire for unconditional surrender is not for a sovereign surrender of the Iranian state, but rather for a change of Iranian state behaviors that the U.S. and Isreal are adverse towards.

Collectively, this points to a change in their political business model with respect to their ambitions of being the dominant regional hegemon that calls the shots for everyone else.

Getting back to Von Clausewitz, the question thus is, is the applied force bending Iran towards Trump’s political will? Is Trump getting what he wants?

• The nuclear program has not been eliminated. Iran’s uranium stocks have not been affirmatively located, secured, taken into possession, or neutralized/removed. This may require special forces boots on the ground. We are not there yet. ❌

• The ballistic missile shield has been seriously degraded and eroded. Missile launch activity is down 90% since open of the war, and drone activity is down 80%. ✅

h/t @ TheStalwart

• The Strait of Hormuz remains closed. ❌

In summary: Two out of three objectives not been met. Senior leadership decapitation strikes are multiple layers deep. Iranian control and command of state capacity remains, however weakened. Iran is now in a position where it is reacting to the war, not shaping it.

Iran’s edge is in running the clock on the U.S. and the world even if it gets militarily decimated. Iran’s strategy for winning or surviving is predicated on the view that high energy prices are an intolerable political price for a U.S. President. 🌮🌮🌮

For Pinebrook, the signal is when the Strait of Hormuz is reopened. Everyone needs the oil, including Iran. Everything else is noise.

Now of course markets front run and buy the rumor. The Strait of Hormuz needs not actually be opened. Markets simply need to approximate when this will happen.

In plain English, this means focus on when the oil flows, not on who claims victory.

And what of the stagflationary supply shock?

This is where things get interesting. Unlike political choices and outcomes of military projections of power, understanding a supply shock and the front running the Fed’s most likely reaction function is the domain in which these have pages have something to offer beyond conjecture and guesses.

This analysis will form the basis of the upcoming Market Commentary, in which this framework is used for deploying risk and making money.

Back in the 1970s, when oil prices spiked, the economy went into a tailspin: growth plummeted and inflation skyrocketed (a painful combination known as stagflation).

However, in the 2000s, oil prices rose even more dramatically, yet the economy stayed relatively stable. Why did the same shock (expensive oil) hurt so much less the second time around?

Three key changes in the economy that acted like shock absorbers in the 2000s.

• Workers stopped getting automatic raises (wage indexation):

• In the ‘70s: Many workers had union-negotiated labor contracts that automatically raised their wages whenever cost-of-living (inflation) went up. When oil got expensive, prices rose, which triggered wage hikes, which forced businesses to raise prices even more—creating a “wage-price spiral.”

• In the 2000s: This automatic link mostly disappeared. Because wages didn’t jump immediately when oil prices rose, the spiral never started, and inflation stayed under control.

• The Federal Reserve became more credible:

• In the ‘70s: People didn’t really trust the central bank to keep inflation down. When oil prices rose, everyone expected high inflation, so they raised their own prices and demands accordingly.

• In the 2000’s: The Fed had established a reputation for prioritizing inflation over the labor market. Because people believed the Fed would keep things stable, they didn’t panic or hike prices pre-emptively. This anchoring of expectations kept the economy calm.

• We use less oil to produce things:

• Modern economies are more efficient. We simply don’t need as many barrels of oil to produce $1 of GDP as we did 50 years ago.

In sum, we can model the changes in this way.

1970’s: Oil shock → inflation → wage increases → more inflation → recession.

2000’s: Oil shock → temporary price increase → limited macro effect.

Oil price spikes used to trigger inflation spirals and recessions, but changes in wage-setting and stronger central bank credibility have made modern economies much more resilient to energy shocks.

What this means is that inflation regimes matter more than oil prices. The economy shifted from a cost-push inflation regime in the 1970s to an inflation-expectations management regime today.

What moves markets now is not the shock itself, but how expectations react. This is why dips get bought.

The Fed’s credibility is the real anchor. After the inflation collapse in the early 1980s, markets bet that if inflation went up, the Fed would crush it. That belief changed behavior everywhere, with a recursive positive feedback loop that looks like this.

Due to the above dynamic, we are still in the green zone below and will likely avoid the red zone.

While the shiny toy model above has its appeal, it must still be squared with the Covid-19 pandemic inflation episode and the post pandemic inflation hangover so that we may contextualize the probability of a repeat.

The vanishing wage spiral mostly held up

• COVID supply disruptions + energy spikes (oil, natural gas) → first-round price shocks.

• Pent-up demand + fiscal stimulus → extra demand pressure.

• Wages started to rise, particularly in services.

• Inflation expectations initially remained anchored, but market pricing (e.g., TIPS break-evens) showed a gradual unanchoring in late 2021/2022.

For the first time in decades, the Fed’s institutional credibility as an inflation fighter came into question because they had waited a long time to raise interest rates, believing inflation was “transitory”.

Thus U.S. inflation break-evens reached a cyclical peak and core PCE hit levels not seen since the early 1980’s.

Once this happened, the Fed came out swinging with the largest and fastest hike cycle in two generations.

Getting back to the shiny toy model and the pandemic experience, the 2021 inflation was much more complex than that of the 1970’s.

• The plumbing of global trade broke (port backups, chip shortages), creating sectoral shocks that oil efficiency couldn’t protect us from.

• People stopped buying services (travel, gym memberships) and bought stuff (pelotons, home offices). This concentrated demand in one area of the economy, causing prices to spike in a way a general oil shock doesn’t.

• This flipped the other way to services after the re-opening of the economy, with a similar price spike unrelated to oil.

• Services inflation and low-wage labor markets were key channels.

• Fiscal Stimulus, in two words: Gargantuan and inflationary.

The salient economic question for 2026 is not whether there is an oil-induced inflationary price spike. That is a foregone conclusion.

• The question is do we have a partial reactivation of the wage-price dynamics with adjacent second-order effects like in 2021, which prolong the current inflation.

• In order words, will the post pandemic experience repeat itself?

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• The movement of the real economy - specifically the services sector - continues to shout otherwise.

• Monday’s ISM Manufacturing report was good, but today’s ISM Services report for February was even better.

Together, they effectively negate the likelihood of an economic downturn in the next several months, provided we can avoid a complete derailment from geopolitical idiocy in the Middle East.

Recall that services represent roughly 75% of all economic activity. While manufacturing has spent the last year in an active restocking cycle, the services sector is now providing the heavy lifting for the broad-based economic floor that has been tracked since January.

Thus, the Pinebrook approach of weighing manufacturing and services by their respective contribution to the economy provides, and then smoothing the data, provides more signal than a simple spot sample.

This is done below for both headline manu and services, and new orders for manu and services.

• Headline Momentum: The services headline number hit 56.1 for February. When weighted with manufacturing, the three-month average is 54.14, which is solidly positive and suggests firms are no longer in a “wait-and-see” mode.

• New Orders Surge: This is the breakout. The forward-looking new orders component for services improved to a robust 58.6. The economically weighted three-month average (including manufacturing) hit 55.18 - the highest level in over three years.

The January ISM note laid out a clear restocking cycle thesis. Now, we were moving from restocking to a proactive growth phase.

February’s data hasn’t just confirmed this, it has accelerated it.

The theme of the month was managing risk in a choppy range bound market that had negative overhangs in U.S. tech, software and financials, and a negative geopolitical overhang with Iran.

• As part of the Mag7 => 493 rotation these that these pages have championed for the past few months, Pinebrook positions avoided the worst PNL consequences of the tech rotation.

• Trimming European exposure (EPOL, EWP, EWU) was net neutral.

There were two big misses in February.

• Missing the long energy trade as the drums of war beat harder regarding Iran.

• A long in KRE, the mid-cap financial ETF, on the basis of Kevin Warsh’s deregulation agenda for smaller, non-SIFI (systemically important financial institutions) banks. The negative catalyst was bank exposure to software SAAS companies that faced threats of AI destroying traditional software business models.

The short call spread on gold miners continued to provide negative PNL. Losses there are capped due to the hedged nature of the trade and the worst of the PNL is likely in the rear-view mirror.

• Miners are above the strike prices of the calls; there is no more price upside to the long side trade.

• As we approach the March 20th expiration date, these options will experience “theta burn”, or time decay.

• As we approach the expiration day, volatility associated with the strikes will fall and reduce the value of the call options.

Stand out trades were:

• The re-entry into S. Korea (EWY).

• The mid-cap industrial basket championed on February 3rd, along with legacy large cap plays in industrials (XLI) and materials (XLB).

• The ITA defense ETF.

• The taking of profits and closure of the short silver trade on February 2^nd.

While the month was a struggle, we managed the most important thing in money management: positive compounding in the face of a negative market.

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Noise vs. Signal.

There is a lot of wood to chop, and we are getting after it here, far from Mexican cartels and Iranian mullahs. En-Shala. 🙏

This is what spot inflation looks like.

The first question is how much of this is a noisy echo from past policy choices (tariffs + big fiscal + prior rate cuts over the past two quarters) and how much of this represents a forward-looking inflection point?

The second and more important question is, what is the FOMC’s most likely reaction function?

1. Transitory inflation look-through which prioritizes the labor market in the face of high spot inflation but with the expectation of future lower trend inflation, which has been the policy Rx by Romer & Romer for this cycle?

To spare new reader search within the above link, the relevant passage is provided:

“To do so, the Fed is employing the Romer & Romer playbook that was referenced in the inaugural note of this series. Recall:

“In particular, we now also look for times when policymakers believed that they were at a stable level of economic activity but took actions to lower the unemployment rate—and were willing to accept adverse consequences for inflation.

That is, we look for times when policymakers were deliberately shifting the aggregate demand curve out because of a change in their view of the acceptable or desirable level of unemployment.

If monetary policy has real effects, output should rise following such actions.”

-(Romer & Romer 2023).

2. Shotting Romer & Romer in the head and abandoning the labor market?

3. Some combination of the above.

To form an understanding of the above, we must look at the sources of the inflationary impulse, and the likelihood of their persistence.

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Friday’s GDP report is the noise.

• The government shutdown subtracted 1.15% points from GDP growth.

• Absent this, growth would have been 2.5% instead.

• This will artificially add 1% to growth in Q1 2026.

• Core GDP, aka real final sales to domestic purchasers, came in at 2.4% and indicates the consumer is in good shape – though not booming.

The inflation data that was received for December is equally stale, given that we already have January CPI in hand.

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The dumping of software stocks under the pretext of being the latest Ai victim is the most recent manifestation of this thesis. While obviously not MAG 7, software is both Mag 7 and Big Tech adjacent enough to be vulnerable to the shift in sentiment that has been driven by concerns over capex ROI which then spreads into broader parts of the economy via the labor market.

This reads like classic “late cycle” trading, where commodity-focused sectors share the limelight with defensive groups. Energy and Materials usually find pricing power after years of global expansion, while Staples and Utilities are where capital goes to hide when the macro-outlook gets murky. Industrials are the odd man out here, but they’ve got price momentum on their side.

This raises the question: does the current rotation actually line up with the fundamentals? In other words, is the market listening to earnings revisions, or just running on vibes?

Revisions vs. Reality: A Divergence

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This is not unwarranted given the post pandemic Q1 seasonal effect where Q1 has been the hottest of the year, with the inflationary pressures concentrated in January.

Based on the latest data surface, there is marginally less upside to Core CPI than what the consensus expects, as this year likely breaks with the post pandemic hot January New Year/New Prices effect.

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We begin with the pink elephant in the room, the precious metals trade. The

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