Transcription
Fine, thank you. How are you?
Good, thank you. Pleasure to see you.
Good to see you.
And we're back, professor. We're back.
Yeah, we're Yeah, we're back. Good Sunday. Our Sunday afternoon routine.
I swear it's it has become routine. Um but it's it's it's been it's the worst we've seen since the ceasefire. Um and the shredder of home was is closed which um to know I don't I don't know why the US would take such a risk knowing that the strategic reserves are getting depleted till now. Um like can Trump afford this escalation and a closure of the straight of home? What am I missing here?
Uh well he he he asserted once and I think he was correct that if the straight remained closed we'd end up with an economic catastrophe and he he didn't want to have that catastrophe hung around his neck. So So it it makes no sense to me whatsoever. And and what's happened, by the way, if you look at uh the inventories in and oil, uh this was from Friday's Wall Street Journal.
There you go. Oil, US oil supply is dangerously low on the front page of the Wall Street Journal.
Yeah, that's on that's on the front page. And we know that when inventories are low, the spot price of any commodity exceeds the futures prices by quite a quite a margin depending on how low things are. So if they're really low, the spot prices quite elevated relative to the futures prices. Now, that hasn't changed that much in the last week since we talked. From July 3rd until the close of the market on the 10th, there's been virtually no change in the shape of the price curve. The the so-called backwardation has remained about the same for gasoline and for for diesel as it was a week ago. Now it it's increased a little bit for Brent crude, but but basically the everything is the same and it's indicating to me that the markets are asleep at the wheel. Uh some something is wrong. We're running low on inventories and and the spot price should be coming more and more elevated relative to the futures prices and that's not happening. So, so that's that's one factor, but that's kind of the close of business on Friday. Now, other things have happened since then. And anticipating that we were going to be on today, I did a little exercise, a little strategic exercise that re actually requires a a pencil and a paper if that people watching are uh in into the into the weeds of what's going on. And let's look at five flash points in in the region right now. And the first one we've talked about Iran's control of the straight of Hormuz. Will will that be removed? I and let's just use to keep the arithmetic simple the 8020 rule. I think there's a low probability that the Iranians control of the strait will be removed. So let's just set it at 20%. We say that's there's a there's a 20% chance that the control of the straight by the Iranians will be removed and the straight will be open. We'll go back to status quo anti the the way things were working be before the US and Israel launched their war on Iran. So that's that's the first point. The second point uh Lebanon will Hezbollah be disarmed. Let's put that also at 20%. There's there's some chance, but not not very high, but let's just put it 20. Hamas will be disarmed and eliminated. Let's let's put that at 20%. Four, the Houthis will be disarmed, 20%. Five, and and a big one is that Israel will retreat into its sovereign boundaries. That means it's out of the Golan Heights. It's out of Lebanon. It's out of the West Bank and and it's out of Gaza. Let's put that at 20%.
Now, now let's now we've got the problem set up and we have to figure out what's called a joint probability. If we look at all those probabilities jointly and and we try to calculate what would be the situation in the Middle East if if all those things were solved simultaneously and and everything was peaceful. So you have to multiply 02 that's 20% 2 times.2 times.2 times.2 times.2. So you got all those five probabilities of 2s. You multiply them out and you get a number and the numeric value is 0.000032. Now that means in in in English that you have 32 1,000 of a of 1% 32 1,000 of 1% is the number. So you have virtually no chance, zero chance that that things are going to work out and and you'll have peace in the region. Now this is this is an interesting calculation. You can plug other numbers. If you don't like the 20% that I put in, you put in another number and you calculate the joint probabilities and you're going to end up any way you cut it with a very low percentage infantestimal amount of 1% probability of things being settled in in the region. So strategically, if I was in in in a the seat of a strategist, I would say, why does the US have a dog in this fight in the region? There's there's virtually no chance of coming out ahead. None.
Yeah. It seems like a big waste of resources and and an a risk that just doesn't make sense.
Exactly. Exact. that that's that's ex
but then why are why are energy prices oil prices not reflecting those probabilities now I do want to just to be fair there is one probability that's more optimistic in that you know you don't need to disarm the Houthis and Hezbollah and Hamas to seek peace in the region because if Hamas is a bit of a different case but if Iranian Israeli relations improve that you know then would no longer be an issue the Houthis would no longer be an issue because the hostilities between those two countries would stop now this is theoretically speaking and this is probably even less likely than the likelihood you gave the probability you gave but I'm saying there's possibly another scenario to have peace in the region now I'm in I'm in your camp that I I just think peace in the region is extremely extremely unlikely but it what I don't understand is that the dichotomy between that and the price of oil it just does not make sense to me the supply demand aspect of the of of the energy markets and the strategic petroleum reserve depletion that we're seeing in that headline you showed me in the Wall Street Journal and now the trade of homes is closed again and there's clashes between Iran and the US every few days. Um Trump saying the MOU is dead. How are oil prices so low?
Well, it's it it is a little bit of a mystery. uh and uh I I I I can't give you a a very satisfactory answer to that because one thing we haven't even talked about refined products coming out of of Russia which which used to be 8 to 10% of of the world of the world's refined products have been cut off and and that's because refining capacity has has been hit very hard in in Russia. Uh just this morning I I talked to one of my colleagues in Moscow and he he told me that it even in Moscow he said it's it's hours to wait to get your tank filled in your car. That's even in that that's even in in Moscow itself. So so we we have a lot of refining capacity that's been knocked out in Russia. Of course, the the the flip side of that is that they're exporting more oil now because they can't refine it. They don't have refining capacity. But the point is you you have jet fuel, diesel, and gasoline that's not coming out of Russia now. And and and they're a significant importer. They're just being number one is the US, number two is the Saudis, and number three has traditionally been Russ Russia. and Russia's out now. So, so why isn't that showing up in in those markets? I I don't know. I mean we we we know we know we know this has happened and I think
I think there's tremendous complacency in the markets in in general by the way not not just in the commodity markets but in general if you look at the US stock market we we essentially have two bubbles simultaneously occurring. We we have a a bubble in the valuation metrics. the price earnings ratios are extremely extremely high uh up just at the same levels they were in the dotcom boom and the other bubble is is actually an earnings bubble earnings are running about 60% over the trend rate so when the valuations come down to more normal levels which which they will and earnings come down to more normal levels which they Well, we're going to see those bubbles starting to deflate. Seriously. But right now, everybody's just all in.
Yeah, it is very odd. Um, have you Is this Do you ever monitor the um crap um the what is it? The crack the
Oh, the crack spread.
Crack spread. There we go. I was going to call it crack price. The crack spread of oil. Have is that is that a metric that you monitor? Because I've had one of my guests, Phillip, who talked about how based on the crack spread, it just shows that the either the refiner, which is the price of the refined product is so high that either the refineries are price gouging or the price they are paying out of oil out of the markets, the barrels coming out of the straight home is significantly higher than the price that's on the market, the the spot price that we're seeing. Um, is that something that you monitor and do you share a skepticism?
Well, the the crack spread, yes, I monitor it. It is large. The this the spread between the observed, we don't know what the the market price of oil, the input and the output refined products that that spread, that margin, shall we say, is is high. And and of course the oil companies are are making out very well
unless they pay but his his theory is they're paying a bigger cost than we think that the that their cost they pay the reason the spread is so high is that their actual cost is higher than the price the the market price that we're seeing that they're paying a lot more a much bigger premium on the oil coming out of the straits. That's why the refined product price is so high.
Well, that that yeah, that that that's that's a shall we say that's an interesting conjecture, but but if that was the case, the profits at the oil companies wouldn't be surging and and they are surging at the the refineries are making a lot of money.
True. So, so I I doubt that I doubt that the physical price ga gap between the the paper price, the futures price is is as high as it once was. Remember when the when this thing when the war first started, remember that was the big the big narrative everybody was talking about the physical prices were much much higher than than they so-called paper prices or futures prices. So, so, so in fact, what what you you had a disconnect between the physical market and the the synthetic market. The the paper market is just a synthetic market for commodities. So, there was a huge gap and and that gap definitely is is narrowed.
Okay. So,
so, so
then how do you, but then how do you, the reason we know it's been narrowed is it because the profit margins of these oil companies based on the reports that they're putting out is, you know, they're making record profit right now or, you know, much higher profits than they did before the war. So, considering this, um, the crack spread is unlikely to be some big conspiracy. I I think I think you have various things going on and that is you you've got refineries down in uh you know the the Saudis aren't producing as much and the Russians last week just cut off all exports period. They they're they're importing refined products. They're not exporting. They're actually importing. So I I think that I think one and and I haven't analyzed this really with a sharp pencil, but one one big factor is Russia.
That that that could be explaining quite a bit of this, by the way.
Yeah. Because the because the the the limited refining capacity makes refining a lot. Um,
and and and just to put put the numbers into context, if if you've got Russia supplying eight to 10% of gasoline, diesel, and jet fuel in the international traded market and all of a sudden you take you take 10% out of the market. Well, that's that's that's that's not trivial.
Yeah. So then how do you describe how do you explain so putting moving away from refined product? How do you explain the uh the price of oil? Like I no one's able to give me a proper explanation of why it's so low. I had one of my guests tell me how um how it's transitory and how the the markets are pricing the world after this war ends.
Well, I think
but that doesn't but that doesn't make sense because why weren't they transitory in the early days of the war?
Well, that that doesn't make sense in the in the sense that uh we it looks like next year just again roughly we'll be running a a pretty at at some point in 2007 we'll switch into from a deficit to a surplus in oil. So, so that that's part of the picture, but that would be picked up in the forward prices that that would be pushing the forward prices way down relative to the spot prices and you'd have a much steeper forward curve and and much more backwardation than we actually have. We we don't we don't have very much backwardation in the
Oh, we're in contango now, aren't we?
Well, we're not in a contango. As of the Friday, once once the third round of attacks got got into the picture, the the Brent closed uh the spot was 7601 and December 2026 was 7544. So it you're talking about basically 75 versus 7550.
Yeah. Yeah.
That's it's almost flat. And if you go out another year to 2027, it was only 7201 with a spot at at uh sp pardon me that the the spot was 76. I said it was 75. I think it's 7601. the December is 7544 and then December of 2027 is 7201. So there's not much backwardation in there.
And if what if what you said was right
that that everyone is anticipating a a lot of surplus in 27, you would you would end up with a December 2027 I think below 7201. So it it's I let let's put it this way. I I think the best way to describe what's going on and we we've talked about this before, but if you really get down to where the rubber meets the road, Mario, you have lots of crossurrens going on. So if that's the case, if you have a lot of crossurrens, you got some positives, you got some negatives, and and and what what what do you end up with? you you end up with a very difficult situation to start predicting anything
and and and and and that's why I came back to what I that little exercise I went through to when we started with those joint probabilities. That's the only way to really get your head around what's going on and and what's going on what whatever probabilities you want to put in there. I put in 20% for good outcomes, but but in fact, you put in the percentages and any way you cut it, you're going to get numbers that are way less than 1%. But then why but then how would you explain Trump's policy of continuing what he's doing, continuing to use military action to try to prevent Iran from charging a fee the straight of Hum being involved in Lebanon as part of the deal between Israel and Lebanon. The US from what I understand is a signatory as well talking about Syria and Syria getting involved in Lebanon against Hezbollah. Why? Why is Trump doing all this instead of just walking away?
Yeah. Yeah. Yeah. We're going to send US troops in to disarm Hezbollah. Lots of luck, fellas. That that'll that'll that'll be a slaughter. Uh you know th this does not make any sense as you know. But you know, Trump is Trump.
That that that's why you that that's why you in in in one man who happens to be the most significant player in the whole scene. You you have the crosscurrens all in one guy. It's it's not like he's saying something that's consistent every day and and makes any sense. We we have one thing one day and another thing the next day. So it's very hard to tell my own view by the way, why he did this. I I go back to my again my probabilities and so forth and that is I think I think Netanyahu got to him. We we have a spoiler. We've talked about this. We we have one Trump wants to get out of this thing and get this news off from his neck. But he he has other forces moving in the other direction and and one of those is Netanyahu and I think uh that probably is going to tell you a lot. It why why why did he change airplanes going back from Switzerland?
Oh, you saw that. You saw that going back from Turkey mean to us?
Excuse me.
Yeah, according to um Yeah, we've got another report now. So, initially the New York Times broke. No, sorry. Ax just wrote a story that there was a plan, an Israeli plan, sorry, an Iranian plan. Well, no, they corrected it. They said Iranian leaders were talking about killing Trump. Trump commented about it in Anchora, then changed the Air Force One, according to the New York Times. Um, and now Channel 12 puts out a report. I saved it here. It came out about 30 minutes ago. Uh, and they took it a step further. They said Western intelligence intercepted Iranian communications discussing a potential plot to assassinate Trump on Turkish soil during his recent visit to Ankura. According to Israeli Channel 12, senior Iranian officials reportedly viewed Trump's arrival in Turkey as a unique opportunity to target the president, but the intelligence was intercepted and passed to the US in advance. The warning contributed to the decision to switch to for Trump to switch to the older Air Force One for part of his return journey.
Okay. Now, now where this this gets back to my point. Where where did that information come from?
From a credible source.
Yeah. Where where in Israel?
Yeah.
So, so so there there you there you go.
It must be true. It must be true, professor.
Well, that that that's that that's that's what you know, if you believe all this stuff, you got to believe in the tooth fairy, you know. they but but you you you know you you have the statement it's almost black on white. I I read other uh accounts uh I I as I recall one in the one in the New York Times that the clincher there were rumors about the assassination thing and revenge the revenge thing was coming up but but the clincher was the Mossad.
Yeah. Exactly. Exactly.
That that's that sealed the deal.
Yeah. So, you're saying that they're planting that fear in Trump's mind to try to drag him back into the war?
Well, that uh that would be a a likely scenario, a likely narrative, a likely story because re remember he he he was so inflamed after he made a decision to to switch planes and receive the intelligence from the Mossad that he said, "If they get me, wipe them off the face of the earth."
Yeah. He did a post about it. Yeah. Um, what's the state of the US economy professor? Any new indicators one way or another?
Uh not really. What what what we have the the the key thing to look at is what's what's going on with the money supply. This is this is kind of the base case. And the base case is the money supply has been growing accelerating its growth. And when the money supply accelerates with a lag, asset prices go up. So that that keeps fueling the stock market with a lot of liquidity. And then with a little longer lag, the real economic activity picks up. So it's fueling real economic activity, which looks looks pretty good. and and then ultimately of course with a lag of about 12 to 24 months after a significant increase in the money supply inflation goes up. Well, where's inflation in the United States? It's 4.2%. The target is 2%. And of course, e every every everyone who discounts and rubbishes the quantity theory of money and they don't pay attention to it like I do, they they say, "Oh, that's just an anomaly. That's because oil prices are up."
Well, it turns out that that's nonsense. Inflation is always an everywhere monetary phenomenon. So the the base case is always what's going on with the money supply and you ask about economic activity and and it looks pretty good
on paper. Well, in in re in reality in reality
in reality but but on paper I mean because it's um it's inflated because of the money printing because of the M2 constant inflation of M2.
The the acceleration in the money supply which is now growing at a at a faster rate than Hanky's golden growth rate, a rate consistent with hitting a 2% target. It's it's keeping the stock market those two bubbles going. Okay, so that's going. Real economic activity is looking pretty good. The unemployment's stays pretty low. It's quite low and inflation is in the picture. All all of those are consistent with an acceleration of the money supply and and a actually a more than adequate supply of money in the market. I think given all the risks that we are talking about these crossurrens and everything else going on that the real economic activity if if we had not been gooseing the money supply would would not look as good as it's looking right now but it looks it looks pretty good
professor now all all of that could change very fast I mean you you get into a super hot war in in the in in the region and may maybe people will start looking at those probabilities that I gave you at the top of our interview and and and and you know they'll get mugged by reality. But I think it I think it's going to take something big because basically what what is going on most of the participants in the market and world leaders they they buy into Trump's pish posh because it it's pish posh. Check check that out.
That's pish posh. Fish pish posh
is an expression used to dismiss something as nonsense or nonsense or trivial. Done. I'm going to start using that term, professor. I learn something every day.
I I love it. You know where I got that? The sage of Baltimore is HL Min. Uh great newspaper man, you know, Sage of Baltimore. And M Manin loved that phrase pish posh. That's where I picked it up.
I'm going to start using it as well. Professor, I uh always appreciate having you on the show.
Well, I appreciate the invitation. It's great to be with you. Great Sunday afternoon.
Great Sunday afternoon. Thank you, professor.
Thank you.
All right, guys. We'll be live again with Aaron David Miller, um one of the most experienced diplomats in Middle Eastern negotiations as part of the State Department. has been part of multiple uh negotiations when it comes to the Palestinian issue and various Middle Eastern issues for decades. You guys should know him by now. He's a regular on the show. He'll be on in 15 or 18 minutes. See you guys shortly.