Off the Run

The Market Needs a Price Signal. Not a TACO!

There is a difference between releasing oil from the SPR (the Strategic Petroleum Reserve) and lifting the tax on gasoline. One creates supply. The other creates demand. Both create more uncertainty, and both are bullish for the commodities.

I was in a cab yesterday and the driver was telling me how he must drive extra hours now to pay for gas (he meant gasoline). He then told me he was hopeful the governor would lift the gas tax (again, he meant gasoline). In my head, I am telling myself just to keep my mouth shut. He doesn’t need to know how it really works. But of course, he then asked me what I think, and I couldn’t help myself: ‘I think lifting the tax is a terrible idea. All that will do is create more demand which we cannot supply right now and force prices higher. We will be left with less supply and no lever to pull to give relief to the consumer later down the road when there may actually be a shortage…I’ll get out here. Thank you.’

This whole narrative about how the market is looking past the conflict because it has been trained to buy the dip, because the rally is being driven by technical flows, because investors think the U.S. economy is more insulated from oil shocks than in the past and because markets believe the worst policy outcomes won’t stick, seems ignorant at best and dangerous at worst. Yes, recent history has shown you should always buy the first dip vs. in the past where you waited for the double dip. In the post-Covid world, it’s one and done, like college basketball. And I get it, investors are fatigued. Waiting on headline after headline, just for it to be reversed or countered hours later. This is exhausting.

So here I am, on my own Chicken Little island, expecting the sky to fall. The market seems to be pricing in an oil shock, one where oil spikes, growth slows, inflation blips higher, then the Fed looks through it and cuts rates later and everything is fine. But I keep coming back to the second and third order effects on the global energy and agricultural systems that can’t just be rebooted like your fancy SaaS platform or your army of AI agents. What if, when this is over, Iran remains in control of the Strait and charges a per bbl fee? What will happen to insurance? What will happen to labor costs (do you want to get on one of those tankers now)? How quickly will all that refining capacity be repaired when the parts they need are the same parts with multiyear backlog due to the power/AI buildout? What if the fertilizer supply chains remain disrupted for just one to two more months as we hit planting season?

The headline is oil. But as the conflict drags on, another underappreciated risk becomes planting season. Now I’m not saying we are going to miss planting season because of a lack of fertilizer from the Mideast, since it is already underway in some parts of the world. However, it could mean lower yields, higher costs and forced substitutions. This is how a fertilizer shock becomes food inflation with a lag. At the moment, the U.S. is more insulated, much like with energy, because much of the fertilizer was already purchased and applied. Brazil and India are more vulnerable because this is the window when inventories should be getting built, and neither can afford much more disruption.

If everything was right with the economy, I might feel a little better. If we were not watching high paying tech jobs get replaced by less high paying healthcare and consumer jobs, I might feel a little better. If consumer confidence was not still scraping around post Liberation Day lows, I might feel a little better. If trade tensions with China had actually been settled, that’s right, I might feel a little better. But none of that has happened. All of those risks are still simmering beneath the pall of the Iranian conflict. The market may be treating Iran as the whole story for now, and China as something that can wait, but consumers will not experience it that way. If energy stays high and trade rhetoric comes roaring back, they will not separate one inflation source from another. They will just feel that everything costs more, jobs feel less secure, and nobody is in control. Which is why my Chicken Little fear is that the market is still leaning toward the same comfortable script of temporary shock, slower growth, and rate cuts later, when what we may actually be drifting toward is something much worse: persistent input inflation, slower growth, and no easy policy escape.

But, what if I’m not Chicken Little? What if the market is? Not because it is panicking, but because it is so eager for a calm, soothing narrative that it follows the fox straight into its den.