Hello my friends. So today is March 28th and this is Markets Weekly. So for weeks we've been talking about how the S&P 500 has been losing momentum. Last week it looks like it's outright breaking down. Coincidentally, next week is the one-year anniversary of Liberation Day. And as we all recall, that was a very very exciting time in markets. So today there's really only one thing to talk about, one thing that matters. That is the war in the Middle East. So let's first talk about how war in the Middle East is bleeding into the real economy and financial markets. Let's talk about how it seems to me that Iran will win this war. And lastly, let's talk about how it will forever change the global geopolitical landscape and US politics.

All right, starting with the economic and financial implications. So first off, how you traded the past few weeks completely dependent upon your judgment on the geopolitical landscape. Now we are in war. Tremendous amounts of propaganda. There are outright lies being put forth from the mainstream media. And looking at the comments, I can see that geopolitics is a topic that many people are passionate about and many people think they have expertise in. So I will present my perspective and if you look at my past few videos, I'm happy with my judgment.

So, the global economy has been nuked and we are moving on into the phase where due to the radiation sickness we are not feeling well. The trade of Hormuz remains closed. There's only a few ships passing through each day. Those ships seem to largely be Iranian vessels sending crude oil to China. Iran is actually selling more oil today than it did before the war. So that means, net on net, the global economy has a tremendous negative supply shock in oil. That supply shock has in part been mitigated by factors such as Saudi Arabia sending oil through a pipe to the Red Sea and also the release of emergency oil stock piles throughout the world. But at the end of the day, the world still is receiving on a flow basis fewer barrels than before and that's showing up in pricing. So, we don't consume crude oil, we consume refined products. Looking at this graph of refined products, you can see jet fuel, uh, diesel and so forth going to the moon. And that's already having some very concrete impacts. You have airlines cancelling thousands of flights because they can't operate at jet fuel prices as high. And that's going to bleed into say, the tourism industry, right? People are traveling less. Think about the hotels and other industries that are dependent upon tourism. You have in Thailand the government ordering some employees to work from home to reduce demand for gasoline and you even have anecdotal reports of farmers in Australia not being able to get diesel. Now, that's going to have downstream implications where industries that are dependent upon these guys then also suffer shortages, raise prices, and so forth. So this really is a slow motion train wreck. It's happening. It's concrete. It's just slow moving and as the straightup Hormuz remains closed, it's going to get worse because over time we will eventually run out of our emergency stock piles and then the shortage will be compounded. There is, I think, the global economy is already in recession. Now, in some cases, if this continues, we will have an outright depression.

Now moving to the financial markets, you can see that the US markets are also beginning to sniff out a recession as well. Now over the past few weeks, as oil prices rose, you can see that the market was pricing in more Fed well, fewer Fed cuts, some possibility of a Fed hike. That's the market focusing solely on inflation, higher oil prices, higher inflationary impulse. But on Friday, even as oil prices continue to march higher, the market actually priced in a more dovish path of policy. That is because as equity prices declined, as this negative supply shock reverberates, the market is becoming concerned that we could be in a recession. And if that's the case, unemployment rate goes higher. That constrains the Fed's ability to focus on inflation. And of course, if you have a recession, there's going to be less demand. And so that kind of moderates inflation as well. So heading into this incident, we already saw that, you know, we were losing a lot of jobs. AI was sweeping through and disrupting many industries. Private credit, for example, continues to be a source of some alarm there. A lot of redemptions. Again, I continue to believe it's contained, but that hurts sentiment as well. And as white collar workers increasingly feared their displacement, they're going to reduce their spending. So, we were already at a time where the economy was weakening. And this really does push us, I think, into a recession.

But that's kind of one way on how we can get out of this. So that leads me to my next topic where it seems to me that the most likely path is an Iranian victory. So right now, last week we had some encouraging science where you had the US proposed a 15-point peace proposal to Iran. Again, this is all fog of war stuff, confidential. So we don't really know what all the points were and how it was treated and so forth. But it seems to me that first off, it's not really all about the US. As we've been talking about for weeks, there are three people at the table: there's the US, there's Israel and Iran. Each party has their own interests. Each party has their own perspectives. Now, the US of course is the least committed to this conflict because it's far away and I think many people are still unsure what the US is doing there. So, they are the one that could more easily be moved. For Israel, of course, it's much clearer. They view Iran as a threat, want regime change, and is something that they have been, well, Prime Minister Benjamin Netanyahu has been lobbying for for 40 years. So this is their dream come true and they don't want this to end. Iran though, I think we are we are hearing some new things that are interesting in their proposals last week. They want the world to acknowledge that Iran has control over the Strait of Hormuz. So what Iran is beginning to find out is that by controlling the Strait of Hormuz, they control 20% of the world's oil supply. They become a regional hegemon. And so that is power that they have. And now everyone has to pay tribute or tariffs to them to be able to pass through. Reports suggest that Thailand is negotiating with Iran for passage of their ships. Said maybe Iran can just make it a business to charge a few million dollars for every passage and people will gladly do that and Iran will be able to make a lot of money. So they don't want to give that up and this is something that seemed to be able to defend.

So in the background of course of these pig talks, we also have reports that the US is sending troops to the Middle East this weekend. The first installment of Marines will arrive. Reports suggest the Pentagon is also thinking about another 10,000. Now, this is not a ground invasion force. This is like an expeditionary force. A proper ground invasion, you need much many more troops. For the Iraq invasion, they needed 250,000. If you look at Vietnam though, again, you can see that every ground invasion begins this way. You have a few thousand for expeditionary troops. You gradually build up and you know, one day you wake up and you have a few hundred thousand troops in. Now, I don't think this will happen. Uh, but it's not impossible. And every proper ground invasion kind of begins this way, just by a few thousand people. Maybe you become committed. You got to reinforce the existing troops, you take losses, you don't want to step down, you don't want to admit defeat, and you just keep adding troops. So that is a possibility, but I don't think it will happen. What seems to me that is the most likely path is that Iran just keeps straight off Hormuz moves closed for the just a few more days, maybe a few more weeks, and we watch the global economy implode. We watch the stock market implode, and that would drive the Trump administration to desperately seek an off-ramp. So, you never want to bet on a market crash because that's just not a probable event. It doesn't happen very often. But looking at the context, the conditions, they are all there. You look at how it's trading, you look at the impact on the real economy, you know, we could really have a repeat of Liberation Day that will really, really panic the Trump administration, especially since this war is already very, very unpopular. It's causing price out the pump to rise and now it's of course it's causing many upper middle class people to panic as their 401ks decline. And should that be the case, I think the US would be more willing to use political pressure to force Israel to also back down. The US does have leverage. The US provides a lot of, you know, interceptors and fixes, aircraft, and so forth. So they could use that leverage to get Israel to back down and reach some kind of accord with Iran. Another constraint, of course, is that the US and Israel are by many reports running low on munitions. So they're running low on bombs, running low on interceptors, and that naturally forces some kind of limit as to how far this conflict can go. Again, and if that's the case, if they are going to run out of munitions, if the US has a lower pain threshold because of its weakness, the stock market, then that logically seems to me to suggest that Iran is going to get more of its demands. Maybe it does retain control of this trade form. Maybe it retains some kind of some kind of guarantee that US and Israel won't attack it again. Remember the US and Israel were having peace negotiations or nuclear discussions with Iran but use that as a pretext to um prepare for their military strike and then attacked. This happened this time and it also happened last June as well. So trust is very low between the parties.

So yeah, we're at a phase where I think the stock market acceleration and decline could actually force Iranian victory, which leads us to our last point. What does this mean? I think it has huge geopolitical implications, but it also has domestic political implications as well. So by pushing the US into an unpopular war and creating a lower stock market and US recession, the market is pricing in greater probability of a blue sweep in the midterm elections. A blue sweep is when the Democratic Party wins the House and the Senate. Now, it's already very likely that the Democrats will win the House, the Senate, less likely, but uh, probability is rising. And if that were to happen, you can easily see, uh, basically a legislative change where the president is really not able to implement any of his stuff when he continues to be maybe pulled through endless investigations. Maybe members of his cabinet or family get investigated, maybe some of them go to jail and you could see a 2028 where you actually end up with a Democratic president and democratic control of all three houses of all of two of the two houses. So, um, the executive and Congress. So that is going to be a very big change and it would be regime change in the United States because you're moving from a party that is all about low taxes and and trying to pump up the financial markets to a party that know cares less about this stuff. So you could have a world where maybe the US becomes more like the country the socialist countries in Euroland or like Canada where you have higher taxes and then you know more public services. Now that's going to benefit some people and it's going to hurt some people, right? Some people will be better off, some people will be less off, that's the definition of redistributional policies. But that is I think very clearly stock market negative, right? Market likes lower taxes, stock market does not like higher taxes. So as we think about the longer term trajectory of what this can mean, you know, that it's uh, I think it's negative for growth and it's negative for financial assets. And and sure, maybe some people will get more benefits. Um, maybe that's better for them. But again, we focus on the markets.

Now, a correlary to this is what does this mean from a geopolitical standpoint? So, I think what we've learned from this war is that, well, not just this war, but also the Russia Ukraine war is that the weapons of modern warfare are missiles and drones. And that allows middle powers to have waged these asymmetric wars that allowed them to withstand greater powers. So many people when Russia invaded Ukraine, many people thought it would be over very quickly because everyone of course living through the cold war think of Russia as a great power. But years on, Russia and Ukraine are still locked in combat. And that is largely because Ukraine has mastered drone deployment and is able to stand up to Russia because of these technological changes. I think we're kind of seeing the same thing here in the Middle East. Whereas the US is perceived to be a global superpower, has a blue water navy, can project force throughout the world. But we're coming to an understanding that, you know, these carrier groups, all these air, these air strikes, things, these are not as useful in the modern world. Uh, for example, the US is, the US carrier, the most advanced in the world, is now actually withdrawn out of theater and being repaired at a nearby air, nearby base and reports suggest that it's going to be out of commission for 14 months, to over a year now. The story is that there has been a laundry fire there and that is putting it out of commission, but other support reports indicate that it's been hit by Iranian missiles or drones and it has to repair. So that reinforces the point that many people have been making that carriers are basically obsolete in a world of missiles and drones. They're basically sitting ducks, right? You can easily take them out. Um, drones and missiles are much cheaper and the more high-tech ones, the missiles, they are hypersonic. They travel very quickly and with good targeting are very precise. So that's leveling the playing field for a lot of these middle powers. Now drones and missiles are things that Russia, Iran, China are very good at and strangely the US is not good at. The second thing to note is that if you don't have an industrial capacity, you are not a military superpower. So the US report suggests is running low on Patriot missiles and all these other munitions. So you really can't project force if you can't produce guns if it takes 14 months to fix your crew carrier. In contrast, you know, Iran, Russia, they're moving on to an industrial economy is producing a lot of drones. And if you look at China, they are the workshop of the world. that they can produce hundreds if not thousands of drones and missiles a day should they choose. So when you think about who is the military superpower today, you got to bear that in mind, who has the industrial capacity.

So if you are a US ally in the Gulf or in Korea, you've noticed that the US is not able to protect you and honestly it seems like it only cares about Israel. So you have to rethink how you manage your alliances with the world, how you manage your relationship with say other poles in this multiple world like China. So this suggests to me that we're going to move to a world where people are going to move not well, not become enemies with the US but they're going to have to hedge their bets a little bit more and become more friendly with players like China. Uh, because the US is just not able to exert as much power as it used to. Now, when you're thinking about an island like Taiwan, then given what we've learned over the past few weeks, there is absolutely no way that the US could wage war and protect Taiwan. It's just it's just so ridiculous, right? So, China is right off the coast. Taiwan is right off the coast of China. China can produce all these ballistic and hypersonic missiles. Any US Navy, even even thousands of miles from China, will be sunk instantly. So there's just no way that Taiwan has any chance in a war against China. And there's no way the US could protect Taiwan. So, you know, this is something that, uh, I I think will impact the geopolitical landscape there. And if you are Korea and Japan, you have to realize that as well. So, we're moving into a new world. It's very exciting. So, we'll see how this unfolds. And again, guys, I think it's a dangerous time in markets. Hope you guys stay safe.

So yeah, we're at a phase where I think the stock market acceleration and decline could actually force Iranian victory, which leads us to our last point. What does this mean? I think it has huge geopolitical implications, but it also has domestic political implications as well. So by pushing the US into an unpopular war and creating a lower stock market and US recession, the market is pricing in greater probability of a blue sweep in the midterm elections. A blue sweep is when the Democratic Party wins the House and the Senate. Now, it's already very likely that the Democrats will win the House, the Senate, less likely, but uh, probability is rising. And if that were to happen, you can easily see, uh, basically a legislative change where the president is really not able to implement any of his stuff when he continues to be maybe pulled through endless investigations. Maybe members of his cabinet or family get investigated, maybe some of them go to jail and you could see a 2028 where you actually end up with a Democratic president and democratic control of all three houses of all of two of the two houses. So, um, the executive and Congress. So that is going to be a very big change and it would be regime change in the United States because you're moving from a party that is all about low taxes and and trying to pump up the financial markets to a party that know cares less about this stuff. So you could have a world where maybe the US becomes more like the country the socialist countries in Euroland or like Canada where you have higher taxes and then you know more public services. Now that's going to benefit some people and it's going to hurt some people, right? Some people will be better off, some people will be less off, that's the definition of redistributional policies. But that is I think very clearly stock market negative, right? Market likes lower taxes, stock market does not like higher taxes. So as we think about the longer term trajectory of what this can mean, you know, that it's uh, I think it's negative for growth and it's negative for financial assets. And and sure, maybe some people will get more benefits. Um, maybe that's better for them. But again, we focus on the markets.