Hello my friends. Today is March 7th and this is Markets Weekly. So this past week was a super exciting week in global macro. We had a huge conflict in the Middle East that is ongoing and of course we had a terrible jobs report. So first off, let's start with our bread and butter. Let's talk about the terrible non-form print. How it suggests that maybe the US is heading into recession. And secondly, let's talk about the super spike in oil prices. How the streets of Harmuz may stay closed than many longer than many expect and how high oil prices would eventually tip the world into a global recession.

All right, starting with the US. So on Friday, we got the latest jobs report and people were expecting some degree of jobs creation, but we actually got a shockingly negative 90,000 job sprint. So the US lost 90,000 jobs last month. Looking at the details, they were also not good. The unemployment rate ticked up marginally, but also the labor force participation rate declined a bit as well. That meant that there were fewer people looking for work and yet despite that the unemployment rate still rose. Taking a step back looking at 2025, we had you know job growth throughout each month last year but at the end of the day after revisions those job numbers were mostly revised away. At the end of the day, in 2025, the US created only 180,000 jobs. The labor market was already weak in 2025 and looks like we may be tipping over into net job losses. Now, recall in January, Governor Waller dissented for a rate cut, suggesting that, you know, his contacts were telling him that layoffs were coming and so he wanted to get ahead of it. Many of us were thinking that he was trying to campaign for Fed chair, which he probably was, but he was also true in his observation and has been proven correct again. And I'd also note that the challenger jobs survey also suggested that layoffs will be picking up. Now, to be clear, there are idiosyncratic things with the most recent job support. There was a strike. We had changes in some model adjustments, but at the end of the day, it's quite clear the jobs market is not doing well. has been weak for some time and is getting worse. Now, there's also been kind of a big puzzle over the past year. On the one hand, GDP data is strong. On the other hand, the labor market data is weak. Now, these two are are in contradiction with each other because normally speaking, if you want to have a strong GDP, you need to have more jobs, right? You need to have more people working in order to produce more goods and services. Now, one possible way to reconcile this is to have a productivity miracle. So you have the same amount of people but because of the AI or whatnot they're producing more goods and services per person. Um and productivity data does show some improvement but only marginally. It looks like that rather than say that the labor market might catch up to GDP as some were hoping is that the labor market is further deteriorating and going forward maybe that would drag GDP down. Now, weak labor market tells me that we are probably heading into a recession if not in one already. So, one way to look at this is that when you have a weak labor market, consumers don't feel secure and so they're not going to be willing to spend a lot of money. They're going to cut back on their spending. Definitely don't want to take on these huge liabilities like buying a house or buying a fancy new car. Maybe won't want to take that vacation. Maybe won't want to dine out as much. So they're going to retrench and that creates a self-reinforcing cycle that uh drags the economy lower. One other point to note is that we've had been in this unequal uh recovery where people who have assets have been able to sustain a lot of sustain their consumption, keep the economy going. Obviously, the stock market is only a little bit below its all-time highs. So these people still have tremendous amounts of wealth. But when I look at the market, it's also very clear that we are in a topping formation. we've lost the 100 day moving average and continue to tick lower. Should the stock market continue to decline, that wealth effect will evaporate and that is also going to be bad for the economy.

On a separate note, I think many of people are are surprised by how resilient the major indexes have been. Now, I listened to Jim Carson who is a volatility expert and he's been making this observation for a couple weeks and that is well supplied. That is to say that dealers are very long gamma. And so his view is that this is going to persist until after March opex. Now when I look at the markets it looks like every time we are selling off it does mean revert. So that very much does look like long gamma action to me and so maybe it will persist until after uh March OPX.

Now the third thing that I think we are barreling into a US recession is because of this conflict in the Middle East that is causing oil prices to spike. So, let's talk about our most ex exciting topic of the week. So, first off, we're in the fog of war, right? So, I don't really know what's going on over there. We get all sorts of reports again that some of it's true, some of it's propaganda. It's hard to know, but I'll make this one observation. Now, in Operation Desert Storm in the 1990s, when the US got together a coalition to go and take out Iraq or at least protect Kuwait from Iraq, oil prices totally imploded the day the bombings began. The implosion was actually historic. I think they declined 30% in a day or something like that. And that was perceived that the market was seeing that this coalition, this international coalition was going to go and rescue Kuwait. they're going to win very quickly and oil will be restored. And that was actually what happened in the 2003 invasion of Iraq. Uh the US again had a coalition and went out to take out uh Saddam Hussein. So the moment that operation commenced, oil prices totally imploded. Thinking was it seems that hey this is going to be a really quick operation. The US is going to win and everything will be okay. And that is actually what happened. uh the US overtook Baghdad in a few weeks and the aftermath was messy, but the military part of the war was was pretty brief actually.

Now, so I think of oil as the ultimate tell as to what's happening in the Middle East. The guys who trade oil, they have eyes on the ground and of course uh hundreds of millions of dollars on at stake. The price of oil is going parabolic, right? So, it's just going straight up. And that tells me that this conflict is not getting better. It's getting worse. Now, it's hard to say. I want to I want to say someone's winning, someone's not winning. But honestly, I have no idea what winning means anymore. I think it I think it depends on who you ask. Another observation that I'll make is that this things have not gone according to the administration's uh intention. And when I think back to last week, you know, President Trump and Israel goes and bombs uh, you know, Iran, takes out Hamini and a lot of their leaders and then goes on TV and says, "Guys, just surrender. We're going to have a great new regime." And, you know, maybe when he even picked some out some people who were US friendly. Well, funny story, that didn't happen, right? They decapitated the regime, but the regime continued to function. they the uh missiles continued to be fired and so forth. So that decapitation strike uh just didn't work and of course you did not have a huge uh popular support to overthrow the regime to to install some kind of US space leader. I think there's a there's a new New Jersey dad thinking that he could be Sha of Iran. He hasn't been there for decades but somehow he thinks he can be Sha of Iran. Uh whatever. So that didn't happen. And apparently a lot of the people Trump had in mind to replace Hamine were were also killed. So I it seems like that plan for just kind of position strike new regime just flat out did not work. And you know I think that if you kind of think about it from their perspective that that's kind of obvious right it's not just u you know a secular country but there's a religious as aspect to this as well. uh the US and Israel killed their religious leader and of course there's some collateral damage, right? Seems like on the first day they bombed a girl's elementary school, killed over a hundred young children. So that's not going to be uh that's not going to generate public support. So obviously you you can't just kill the religious leader, kill their local people and then expect everyone to to just welcome you and you know have democracy or not. So that was actually surprisingly stupid idea which actually reminds me of this theory that professor Robert Pap of the University of Chicago has. So uh professor Pape has actually been modeling Iran studying Iran for for two decades and now it's finally his his time to shine. He has an account on Twitter and also just wrote out a subspect. So his uh his theory is that there is something called the smart bomb trap where countries that are technologically advanced think that they could you know successfully prosecute a war just by just you know surgical strikes right just hey we have great intelligence great technology we can kill anyone anywhere any time and so because of that that means that we can successfully achieve war gains so so what the smart bomb trap is that that's actually not the case uh they were able to successfully kill Hami and his lieutenants very instantly. Very amazing military achievement. But when that happens, something changes on the ground. You have nationalism, right? And in their case, of course, a religious aspect as well. And then you have a rally around the flagged effect and then resistance hardens. And so what happens is that what begins as some kind of precision strike for regime change ends up into an escalating uh all-out war, which is actually what we see happen. So, Robert Pap is correct in his theory and this regime same stuff is honestly never worked but they keep trying anyway. So, that's kind of concerning that they even thought that this could happen.

Now, the second concerning thing is that these guys the US maybe Israel I don't know um did not seem to anticipate the tremendous spike in oil prices. Now, Iran of course has been threatening to close the street up for moves for decades and decades and decades. So that is a trump card that they've always held and it just didn't seem that that was planned that they would do that because uh one way to look at this is the the SPR the strategic petroleum reserve in the US. So that is basically a big piggy bank of oil that the US could use that they began uh during the 1970s and 80s when we had this huge oil spike and they just kept it. Biden released some of it during the Ukraine war to kind of put downward pressure on oil prices. But after that, the administration didn't really make much of an effort to refill it, even though oil prices were very low. So they went into this Middle Eastern war with an SPR that is only half full. So that tells me they were not anticipating that uh Iran could close the straight of Hermuz, that oil prices could spike. So that's kind of two counts of severe incompetence of the uh Trump administration in in this military endeavor. And that's kind of worrying to me because that tells me that we have stupid people in charge and we're probably going to continue to make more and more mistakes.

So the straight of Hormuz is Iran's trump card because the straight of Hammuz from you can see in this graph is right next to Iran and about 20% of global crude oil passes through that and when they shut that down that is a huge negative supply shock and it's causing oil prices to spike. So a lot of people say that oh it's really hard to close straight off moves and so forth that that's total nonsense because in practice it's already closed right. So uh you can do think about it in a couple ways. You can think about it as say um because of the higher risk insurance companies pull back. No one wants to fly cargo uninsured so they don't go through. Another way to think about it is that you know you just have random people maybe just a few guys with camels just hidden all throughout the coast with some drones, homemade drones that they can launch and attack your oil tanker. That's a significant amount of risk and so no one wants to go through. So they don't have to just kind of have a huge barricade and close the whole thing. But these threats and lack of insurance is enough to effectively close straight which is what is happening right now. And so that is what is that is what is causing oil prices to spike. Now this has a domino effect because a lot of the oil producers well if they don't keep shipping their oil they will keep it into their storage but once their storage is full they will have to shut down production and when they shut down production it takes a little bit more time for them to restart production should they ever restart production. So for oil, you know, you turn off the pipes, okay, you start uh but you also have natural gas, liqufied natural gas, which is a lot more difficult to manage. Uh in order to have natural gas stored, of course, you have to freeze it to very low temperatures. That takes a lot of energy. And if you want to restart the plant that freezes all the natural gas, it also takes more time. So for example, what Qatar is saying is that they are uh they are shutting down production in some places. And if this predicts, they will just have to keep shutting down perception. And in the future, if the straight up moves is ever opened, it's going to take even more time for them to restart. So you have a permanent supply shock here, a potentially permanent supply shock uh that that is going to weigh on the global economy. So this is kind of reverberating throughout the world right now. Now, a lot of people are looking at countries like uh Japan or China that are highly dependent upon oil, but those guys are actually run by smart people. So, Japan has enough oil reserves to last uh several months. China literally has a billion dollars in their reserves. They could last for a few months. They're going to be okay. And reports suggest that the Iranians are allowing Chinese flagships to pass through. So, it's not going to impact China as much. uh what it's really going to impact is Euroland because Euroland of course already uh trying to wean itself from Russian gas uh also shut down their nuclear power plants and so forth. So this is a double shock for them and it's going to hurt them significantly. Uh but of course uh many of them still support the US war efforts. Um so this has the real potential to uh to just push oil$150 $200 and also the by extension cause a huge global recession and this is impacting financial asset prices in Japan and Korea already. Now to be clear, a lot of the surging a lot of the huge surge in the Cosby and and the Nicay is just momentum and leverage. But you do see that this is going to have a negative impact on them. Specifically, if inflation rises, perhaps the central bank will will hike rates or at least not cut rates and that is not good for their financial assets. So what many people are thinking right now is just how do we get out of this?

The basic thinking of course is Trump will taco because that's what Trump does, right? Oil prices surge, stock market goes down and he will taco and everything is okay. Now if you look at the volatility complex, VIX is high, you know, fixed strike V is also high. So in the event that we do have a sudden resolution to this uh V is going to get crushed. People will take their hedges off and we going to have a huge huge relief rally and easily probably go to all-time highs. So there is that fuel there for an absolute surge should this happen. But I'm getting the sense that maybe Taco maybe this is just I think Taco might be a little bit farther than we think. And I'll think about this from from the perspective of these different actors that we have here. So first off, I think that Trump actually wants the taco. He doesn't want to be in this war to begin with. Right? So if you look at the long history of Trump and people in his cabinet, it's very obvious that they've been saying anti-war stuff for a very long time. But they're not in this war for themselves. they're in this war because of Israel. So for them, it's not really their call to make. A lot of it is going to be up to Israel and it's going to be up to Iran. So at the moment, I don't really count on Trump tacoing because he's not the driver. Now on from Israel's perspective, now if you listen to this reporter from the Washington Post, here's Prime Minister Netanyahu basically very happy, right? Bombing Iran is his dream of 40 years. 40 years. So obviously he's not going to taco. This is everything he's dreamed of and more. So I I don't see any reason why why they would stop. Uh now let's move to the Iranians. Now the Iranians are are in a position that they kind of can't taco. So over the past year or so they've been bombed whenever the US and Israel feel like. Right? That's just no way to to run a country. Uh it's kind of like what they teach you in elementary school, right? if you keep getting punched by the bully, you got to stand up to show deterrence. And so that's what they're trying to do right now, show deterance. Now, it seems like the Iranian Iranian army, the Iranian, the IRGC, not the army, the IRGC continues to function because according to reporting from the Wall Street Journal, they have this kind of mosaic strategy. Whereas although the commanders are dead, uh the local commanders have some kind of a plan or are able to function autonomously so that they can continue to operate. And so they do continue to operate. Now I don't know what their military capa capabilities are likely degraded from all these uh attacks from the US and Israel. But really it doesn't take a lot to close the streets of Hmus, right? And these guys, they they can use low tech stuff, drones that bio counts they can manufacture in their garage and put on their pickup truck to go and send. That's something that's just going to continue like Iran is huge, right? It's size of a few Western European countries put together. And uh there's just no way of stopping this. So they can continue this to as long as they want and it's in their interest to continue this because you know as they continue that as they continue to shut the straits of Hamoose down then production becomes permanently hampered and oil prices could easily surge and that would cause global markets to tank and that is where they could get finally get some meaningful deterance. So it doesn't seem like they have any reason uh to taco as well. As an aside, I also mentioned that many of their Gulf neighbors are very upset and would also like this war to stop. We saw that uh Dubai and Saudi Arabia being attacked. You know, the funny thing is that these guys all host US military bases thinking that if they had US military bases uh the US would protect them from stuff and so they happily paid tribute to the emperor, promising to invest all this in the US and maybe investing stuff in personal Trump family ventures, buying all this military equipment. Uh but when things got real, the US was the first to leave and they were attacked because they hosted US bases. So uh some bad planning on their part and maybe that will rethink cause them to rethink their relationship with the US. And so there is definitely a permanent damage I think to US power in the Middle East from this conflict. So my best guess is that this is probably still going to get worse. I I would not expect a taco. And um gosh, I think next week is going to be even more exciting.

All right. Um that's all I prepared for today. Uh thanks so much for tuning in. I'll talk to you guys. Oh, one more thing I think this is kind of important. So if things code on when if things continue the way as it is uh the only way I think we really want the only way to really achieve uh just total regime change in Iran. I think there's only two ways. One is you do have a proper ground force invasion and you have the US out rumors suggesting the US is seemingly going to send some troops on the ground. You have reports that they are sending a third aircraft carri into the region. So that is one way and I think that is unlikely but it is possible. Of course Iraq never one expected Iraq to become the mess in quagmire that it was but it it did become that way and maybe Iran would be the same. And the second is just the use of nuclear weapons. And so Israel and US are both nuclear armed powers. And I see no reason why they wouldn't just use it to expedite the uh the result. It's true that you basically have never had an aerial uh regime change war in in many decades, but you also recall that let's say in Japan, they just totally demolished Hiroshima and that was enough to get the emperor to surrender. Again, there are other factors involved as well. So, you know, I I don't see why they wouldn't do the same. It would be bad for international opinion. It would be bad for u humanitarian reasons, but it's pretty obvious that uh they they don't really care about that. So maybe that is a possibility as well. So that is you know not a base case scenario but I wouldn't dismiss it the way that most people dismiss it. I think that we are in a world where things are very different and so a lot of taboos that uh people thought existed uh are probably not there anymore. All right so anyway that's all I prepared. Talk to you guys next week.