"There is no instance of a nation benefiting from prolonged warfare." — The Art of War, Sun Tzu
In my previous post, I commented that "the US has to decide which path it should follow" — whether it wants to be an influential global empire with world's reserve currency status, or build a manufacturing-based economy with a competitive currency. These are mutually exclusive options. In the past few weeks, it seems the US has clearly made up its mind: it wants to be the global hegemonic empire and use overwhelming force to address problems and perceived threats.
One of those perceived — or real — threats is the uncertain future of the Petrodollar, which requires controlling the flow of oil at as many key chokepoints as possible. This war likely has nothing to do with Iran's nuclear weapons, and everything to do with global dominance and maintaining the Petrodollar's role in world trade, with China as the primary adversary. China is steadily putting in place alternative payment and transaction systems with its allies and trading partners, playing the long game. When China acts in its own best interest and the US tries to counter it, we are inevitably going to enter a long period of conflict and strife across the globe. Unfortunately, history teaches us that when you are the leading empire, you also attract many adversaries who want to bring you down — chipping away at your power one brick at a time, or one drone at a time.
Impact of War
As the war in Iran reaches a tipping point, a combustible mix of economic forces has emerged: higher inflationary expectations, a strengthening dollar with the yen crashing toward 160, increasingly challenged US Treasury auctions, counter-intuitively rising Treasury yields, and declining global liquidity — which had already peaked in the US before the war began. These factors are not supportive of risk assets, whether stocks, bonds, or commodities (other than oil/gas).
Oil prices have a direct and observable impact on global liquidity. Oil is absorbing more liquidity than usual right now due to tanker rerouting, storage costs, rising insurance premiums, and the use of alternative shipping routes. Governments across the world are scrambling to secure energy for their citizens. Significantly higher oil and gas prices also drive broader inflation — since energy is an input for virtually everything — and since central banks' primary mandate is to keep inflation in check, this should translate into higher interest rates. That creates a double-whammy effect on global capital flows.
At the same time, major central banks — especially the Fed — cannot afford to raise rates meaningfully at this juncture, given the level of public debt outstanding. This could point toward runaway inflation if the crisis continues. Higher rates would also exacerbate the post-COVID debt rollover cycle bearing down on us over the next several quarters. As Mohamed El-Erian, Allianz's chief economic adviser, has noted, the bond market is clearly signaling that it is more worried about inflation than about growth or a flight to quality.
The Department of War has requested $200 billion to fund the Iran war — without Congressional approval. The US defense budget is set to increase by 42% starting this October, reaching $1.5 trillion, while our Social Security retirement fund is on track to become insolvent by 2032. Historian Niall Ferguson has identified a critical threshold — sometimes called the Ferguson Limit — where a nation's interest payments exceed its defense spending, marking the beginning of a decline in geopolitical strength. Dramatically expanding defense spending is not the answer to that structural problem. The bottom line is that money printing will need to run hot for the next several decades, unless something fundamental changes.
Gold Prices
What is better for precious metals — primarily gold and silver — than out-of-control money printing that fuels monetary inflation? Geopolitical crises are also typically bullish for gold. This time, however, the relationship has been less straightforward. The same is true for Treasury bonds.
After an initial correction, gold appears well-supported at current levels — roughly $4,000–$4,500 per ounce. At the risk of sounding wonkish: there is a metric called the Gold/Oil ratio, which has historically mean-reverted to a stable range of roughly 16–20 over time. It currently sits at around 40. Does this mean gold will fall further, or that oil will keep rising? Gold appears structurally supported above $3,000 per ounce, thanks to sovereign buying led by China and the Gold Road initiative. But it may also mean oil has room to run toward $150 or beyond in the near term — that is my current expectation.
I attribute the recent gold sell-off to deleveraging by hedge funds and CTAs in the face of uncertainty. In stressed markets, people tend to sell what they can first, not what they should. GCC countries are also in a position where they need to raise liquidity to offset lost oil revenue, and they may be selling gold into strength here, given the massive run-up in prices over the past twelve months.
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US and Global Markets
We did get a bounce in US markets last week, and I attribute much of it to the quarterly OpEx (options expiration) and rebalancing cycle, alongside some "end of war" hopium and deeply oversold conditions. I hear comments like this from traders: "this market should be down 15–20% and volatility should be in the 40s" — so what is the secret sauce keeping losses in check and causing volatility to implode beneath the surface?
The answer lies largely in positioning. Large market participants came into 2026 mostly fully hedged, at least through the end of Q1, which makes them far less inclined to press aggressively short into the hole. The US tech trade began unwinding in late 2025, and combined with mounting macro risks, this prompted major players to hedge their positions early — which itself compresses volatility.
A concrete example: every quarter-end is associated with the JPMorgan Hedged Equity trade — a $30 billion+ strategy using put spreads and a collar structure to fund the position. When this trade is rolled over into the next quarter, it can create massive shifts in volatility and market structure. Rumor has it that the end-of-Q1 strike for this trade was SPX 6,475 (Ref) — a level the JPMorgan desk bought at scale, with dealers and market makers sitting on the other side of the trade at expiration (3/31). The unwind of a position this size produces dramatic gamma effects on option prices, effectively reshaping market structure. As market makers and dealers close thousands of SPX option lots, it creates volatility compression and a catapult effect through key SPX strike levels. These effects can persist for several days.
The key takeaway: while macro forces drive markets over the medium to long term, in the short run, flows and positioning can produce the opposite effect — and that can be genuinely misleading for retail traders who try to buy the bounce expecting follow-through.
A second factor worth noting is the dispersion dynamic in the current market structure. Many leading stocks fell 40–50% during the correction, while others held firm — creating a dispersion effect that contained the overall damage. In short, volatility contraction combined with dispersion and divergence across the market put a lid on what could otherwise have been a wave of panic into quarter-end.
On the fundamental side, US earnings expectations remain far too optimistic. Wall Street analysts have not yet recalibrated the earnings component of P/E multiples to reflect the current environment. For international markets — particularly across APAC and Europe — this may just be the beginning of a protracted disruption that forces more and more energy supply offline. Roughly 30% of GCC output is currently affected and counting. Leaders in these countries are losing sleep over energy scarcity, and with good reason.
We are now in a situation where even if the war ends, the Strait of Hormuz cannot simply return to business as usual. And it is not only oil that transits the Strait — multiple critical industrial commodities are also flowing through that chokepoint, including helium (used in semiconductor manufacturing), sulphur (used to produce sulphuric acid for industrial and agricultural applications), and LNG used to produce the nitrogen that goes into fertilizers. Shortages of these inputs are beginning to cripple parts of the global economy. Most of these disruptions are inflationary in nature and carry significant unintended consequences for global supply chains.
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