Aftershock

Oil keeps going up, and the current shock has become one of the most important ones in history and, as it usually happens, all kind of historical statistics start to pop up, which are informative of what happened in the past, and influence what can happen in the current episode. The bottom table below shows the duration in days of wars since the 1990 Gulf war, the stock correlation and stock max drawdown. Notice that the biggest stock drawdowns occur when the duration of the conflict is long. We’re curently in week 2 of this conflict, and in the top chart it shows the odds of a regime fall in Iran by December 31st (300 days), and they’re less than a coin toss. If we were to extend this conflict onto the end of the year, which will probably mean Trump will lose the Midterms, we could have a scenario like the gulf war. This time however, the debt levels in the U.S. are much higher than in the 90’s, the deficit is already one of the biggest in recent history and market valuations are stretched. Oil futures have climbed above $100, and tomorrow, the CPI for the month of February will be published. This is data before the start of the war with Iran. It’s the one the Fed will take as input for the March 18th FOMC, but the economist consensus will start incorporating this oil shock into the numbers for March, and the Fed will too. The Energy sector is already the leader YTD with 19.1%. Prospects for the equity market don’t look good, unless we stop the bleeding, for example with an extraordinary OPEP meeting to increase production and solution for crossing Hormuz.

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