The Breakdown - The Macro Chain Reaction of Oil Shocks | Forward Guidance

Episode Date: March 19, 2026

While The Breakdown is between seasons, we’re sharing a recent episode of Forward Guidance. Felix is joined by Bob Elliott to break down how oil shocks impact inflation, growth, and central bank policy—and why markets may be underestimating the risks. As always, remember this podcast is for informational purposes only, and any views expressed by anyone on the show are solely their opinions, not financial advice. – Forward Guidance: https://www.youtube.com/@ForwardGuidanceBW Follow Bob: https://x.com/BobEUnlimited Follow Felix: https://x.com/fejau_inc Follow David: https://x.com/dcanellis — Nexo is the premier digital wealth platform. Receive interest on your crypto, borrow against it without selling, and trade a range of assets. Now available in the U.S with 30 days of exclusive privileges. Get started at http://nexo.com/breakdown Get top market insights and the latest in crypto news. Subscribe to Blockworks Daily Newsletter: https://blockworks.co/newsletter/ —-- Timestamps: (00:00) Introduction (02:57) Oil Shock Challenges & Today vs 2022 (10:38) Nexo Ad (11:13) Oil Shock Challenges & Today vs 2022 (Con’t) (16:12) The Energy Shock Impact on Households (20:14) How Will Central Banks & Bonds React? (30:40) Nexo Ad (31:37) Oil Shock Sequence of Events (33:26) Iran War’s Asymmetric Regional Impact (39:57) What Happens to Gold? (43:02) Understanding a Wartime Economy (47:34) Final Thoughts - - Disclaimer: Nothing said on The Breakdown is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Host and guests may hold positions in the companies, funds, or projects discussed.

Central banks never ease into an oil shock. It doesn't happen. When you have an oil shock, it's a very difficult scenario for basically policymakers to respond to because it both increases inflation and decreases real growth. I think a lot of people are getting ahead of themselves on talking about the disinflationary impact of an oil price rise. The first step is prices go up, real spending goes down, and that's where we're at right. It has to get bad before someone does something about it in order to make it fun.

People are kind of looking through that has to be bad in order for something to happen. And just assuming everything will be okay forever. And that's just not how markets or economies certainly have worked over the last 100 years. Hello, Breakdown Listener. This is your host, David Canellas. We're taking a small break as we prepare to roll out a new season. So for now, please enjoy this recent episode from another Blockworks podcast, Forward Guidance, all about the impact of oil shocks in light of the Iran war and the situation with the Strait of Hormuz. So enjoy the insights into Massachusetts.

and we'll see you again for the breakdown soon. his summit represents over $4 trillion in assets under management, with more than 150 speakers and 750 institutions in attendance. Speakers include leaders from firms like BlackRock and Franklin Templeton, senior policy makers and regulators. Don Wilson of DRW will be there, alongside core crypto infrastructure teams across Bitcoin, Ethereum and Stablecoins. If you're looking for a serious institutional grade view of where digital assets are headed in 2026, this is where that conversation happens. Use code breakdown 200 for $200 off. Learn more at blockboats.com slash events. back to the show. Nothing said on the breakdown is a recommendation to buy or sell securities or tokens.

This podcast is for informational purposes only and any views expressed by anyone on the show are opinions, not financial advice. Hosts and guests may hold positions in the company's funds or projects discussed. All right, everybody, welcome back to another episode of forward guidance. And joining me is one of my favorite repeat guests, Bob Elliott of Unlimited Funds, always one of the best folks to get on to understand high level macro frameworks and how it impacts the world, the economy, markets, everything in between. Bob, always great to have you on here. Great. Thanks so much for having me. I feel like when we try to find a good time, which was a few weeks ago, you know, the world was a very different place than it is today.

So we'll just roll with the punches and talk about what's going on. Yeah, honestly, probably silver lining that, yeah, we were planning to do this a few weeks ago and then I got delayed. And now we're in a completely different situation, completely different conversation that were passed. At least at all, yeah, we're in a month. amongst it now, we're going to try and put on our geopolitical hats on a little bit and try to figure out how to understand everything that's going on with the Iran strike and how it impacts the global economy. So you've been writing a lot on your substack, which is really great. You've been writing a few different pieces on how to understand the context of this oil shock of the Strait of Ramews being closed and its impact on the global economy. And yeah, like I said, you're really excellent at these high-level macro frameworks.

So I just want to understand to you when you see something like this happen and you contextualize it with where the global economy was heading into this supply shock, what does it look like? How are you understanding this and how does it relate to different oil shocks that we've had, like the 2020 one and even the 08 one? Like we had a pretty significant oil spike back then that led into a recession. So yeah, walk us through. How do you, how do you digest something like this when it hits? Yeah, well, I think we were coming into the beginning of the year experiencing something that I call. the savings-driven economy, which I sort of describe in contrast to what was for many years post-COVID an income-driven economy. And what I mean by a savings-driven economy was we started to see,

basically, that spending continued to hold up and investment continued to hold up, despite the fact that, you know, it took more to savings from households to keep that spending going as labor markets weakened and more to savings from businesses to keep their pace of investment, particularly related to AI and such, alive. And so that's sort of the premise coming into this, which in many ways created an economy somewhat on a knife edge, meaning if things had gone well and the government was pursuing modestly expansionary policy during the year and asset prices lifted a little bit, we were probably going to probably at least meet those sort of expectations, maybe even do a little bit better than the expectations that sort of was out in

markets at the outset of the year. I think the challenge is when you have an oil shock, it totally rewrites the conversation. And the reason why that is is because it's a very difficult scenario for basically policymakers to respond to because it both increases inflation and decreases real growth. And as a result, you know, policymakers are kind of kind of stuck in that sort of environment. And part of the challenge is when we were coming in, we had already had a lot of disavings sort of baked in the cake. And so there's not that much room for additional the savings to be applied in this circumstance.

It doesn't mean it's impossible or the households won't to save at all. It's just we're in a very different environment now than we were, say, if this happened two or three years ago. And so I think the challenge is basically for households and in particular, that we're already spending more than they were earning to saving relatively rapidly. Now you basically add another one to one and a half percent price hike across their basket of goods to households that were already spending at only about a percent and a half to wrap up the year in real terms. And that basically means household consumption is likely to fall to zero in real terms.

And for an economy, U.S. economy that's so reliant on household consumption to keep it going, you know, zero real household consumption is pretty antithetical to expectations of growth of two to three percent that we've become used to. Yeah, so contrasting that with 2022, you know, back then we had probably one of the hottest labor markets we've ever seen, like job openings are just absurd. And so I'd love to just hear, you know, back then when we had that one in 2022, it seems like we narrowly missed a recession on its own. You know, some people debate the, semantics that we did see a little one, but whatever. The fact is that we came out of that

somewhat unscathed. And it feels to me like that is because, yeah, the labor market was in an excellent place. People were stuffed with cash from COVID-era stimulus. Companies had plenty of cash as well. Things were good and we narrowly avoided any sort of major issues there. I get the feeling that, yeah, consumers and households, like you said, are in a very different situation right now. So I'm curious, like when you see something like this, this oil shock that leads to higher prices and then lower consumption, how at risk are we today versus 2022? Well, I think 2022 is really helpful because to study it helps you understand all the different mechanics. So what happened, you know, while the magnitudes are slightly different,

the mechanics are actually super similar in the sense of going into it, we had a period of elevated inflation, you know, that was sort of underlying the economy. Now, of course, that was related to COVID shocks and it was at a higher level versus today, which is essentially, you know, tariff-related plus in terms of inflation dynamics and at a lower level. But that's sort of kindling that existed of elevated inflation in the economy before the oil shock existed in both places. In both places we had actually basically the same size oil shock. If anything, this oil shock might be larger based on just what's priced into the curve. So, you know, leaving aside whether you believe that that's good pricing or bad pricing or whatever.

If you just basically take the curve as the market price and a future path of oil prices, this one's actually going to be a bit higher. The 22 oil shock largely resolved within a year, meaning it started at the beginning of the year. It peaked first in March and then in the summer, and then it went back to basically where it was to start the year. Right now, oil prices are projected to be 40% higher at the end of this year than they were at the beginning of this year.

So that's a more extended oil shock. And in that 2022 case, basically what you saw was you saw, you know, inflation continued to be elevated. Fortunately, nominal earnings growth was relatively strong during that period, particularly when you add in all the transfer payments that were still sort of in the system. It allowed households to save in response to maintain their nominal, you know, to maintain their real spending to some extent. But you still saw a reduction in real spending. And so those in the 22 period, if you just think,

about each one of those levers, it was like household spending was strong nominally, right? So picked up nominally, financed by disaving, but real spending fell. And that's a perfect example of this combination that I'm describing that comes with an oil shock, which is both prices rise because people to save in order to keep up the real spending as much as they can and real spending fall. So it's really hitting essentially both sides of, say, the Fed's mandate. And what did we see in response from the Fed? Now, of course, it was sort of the unlucky outcome that forced the Fed's hands to transition

from basically the transitory narrative to the not transitory narrative and hike a whole heck of a lot in response. And today, what we're seeing is at least so far, we've seen an unwind of expectations of easing to basically neutral policy. I think the real question is, is actually the next set of policies likely to go higher because this will be enough to sort of force the Fed's hand? Certainly in neither case did we see the Fed cutting into an oil shock, right? We didn't see that at all.

We saw the exact, at least back in 2022, we saw the exact office. Step into a new era of digital wealth with Nexo, the premier digital assets wealth platform. Earn interest on your digital assets. Burrow against them without selling. Trade a wide range of cryptocurrencies, all in one place. Nexo is now available again in the U.S.O is now available again in the U.S. US with an evolved product suite tailored to today's market. For a limited time, new US clients can unlock 30 days of exclusive wealth club premier benefits,

including enhanced interest rates, reduce borrowing costs, and up to 0.5% crypto cashback on trades. Get started today at nexo.com slash breakdown. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Okay, so if we just think about like a matrix of the quality of the economy going into these shocks, so you have the current one, you have the 2020 one. I'd love for you to also unpack what happened in 08 and what was the quality of the economy back then going into it. Because obviously that one, we saw oil prices surge and then we just had, yeah, one of the greatest, you know, the great recession.

And oil prices crashed afterwards. And, you know, there's this whole demand destruction there. So I just love to add onto the on to the matrix here of what did it look like in 08 and how did that sequence of events look like? Well, I think interestingly in the 08 cycle, there was, obviously, obviously a huge surge in oil prices, I mean, more meaningfully than we're seeing right now. And it was predominantly driven at the time by a tight market intersecting with relatively strong demand from the emerging world. You know, there's the, for those folks who are back around that time, there's a whole

idea of a global decoupling, right, that maybe the U.S. was going to face some pain related to its housing problems, but globally we were going to decouple and it wasn't going to be a problem. And the reality was at that time that the sort of global growth narrative or the data outside the U.S. was quite strong. And it was only when the credit problems emerged in the U.S. that created the second and third order consequences through the U.S., the economy and the financial system that we saw a withdrawal of capital that basically crushed the emerging markets. and created that reduction in demand. And so in some ways, I think people who are not sort of living through that period

might confuse and confuse that period as indicating a strong U.S. economy or even the oil price rises were a meaningful driver of the economic slowing that occurred. And they were pretty marginal. It was pretty fast. It was pretty marginal. And the big story there was the credit problems because, I mean, the credit problems were And the credit problems nearly ruined the entire financial system. So, I mean, it was just like orders of magnitude more important for the economy in the U.S.

But what it did highlight was just how tight that market was and how relying it was on emerging markets, who then were sort of the ancillary, you know, took sort of the ancillary hit from the U.S. financial problems. Got it. Last historical analog, I want to ask you to contextualize the situation. And I know I'm really testing your financial history, but you've also written a lot, studied a lot of big macro cycle. So I feel confident you can answer this one too. The other one is, of course, the 1970s oil shock and what happened there. Obviously that one was the great inflation that also ensued in the 70s.

So, yeah, I would lastly just love to understand what was going on there and how is it different from today? Yeah, I think in many ways the linkages are similar to today, but the magnitudes are very different. And so I think that's people often try and draw analogies of magnitude. And analogies of magnitude are kind of silly because, you know, for instance, back then, oil prices went up four or five X, right? Okay, so oil prices today are not going up four or five X. So we're not likely to see the same sort of magnitude of inflationary pressures in the economy. What that doesn't mean is that doesn't mean that the linkages are to be ignored. The linkages are the same exact linkages at different magnitude.

And so in that case, you really had a lot of ways I talked about the sort of post-COVID period, I think is being very similar to sort of that late 60s environment, where you had sort of persistent inflation that was grad. creeping up large fiscal expansion, large deficits, not much credit driving the economy. That's why I think the late 60s is actually really not much sort of household credit or corporate credit or borrowing driving the economy, a very income-driven expansion that eventually got to a point where we had an oil shock and that oil shock created a lot of pain in the economy and create a lot of inflation and pain. And then we had another oil shock on top of it, right? And so

I think it's a good analogy in the sense of sort of similar kind of kind of kind of kind of that existed, meaning like inflation was a little too high for a little too long. An oil price rise occurred. And that that created basically the conditions that we saw in 22 and likely to see here, which is rising prices and weakening real demand and real activity, creating a challenging circumstance which sort of forces the central bank and the Fed into tightening, even though it's kind of an unpleasant tightening given the set of circumstances that existed.

Cool. All right. So coming back to present day, we have, in a economy, as we mentioned in the last few months, was largely driven by dis-savings. So savings are becoming lower. And, yeah, I want to contextualize that with what you're seeing in the health of, yeah, the consumer in terms of it's spending potential and what the incomes were looking like going into this. And so you mentioned that the current oil market is pricing in a crisis that is more

extended than the 2022 one leading into this situation of an economy that is on a knife's edge largely held up by the savings. And when you put that all together, how do you see things playing out from here on? Well, I think coming into this, it's good to just start with the baseline dynamic and and sometimes macro folks will try and make an economy more complicated than it is. Like the U.S. economy is basically households earning money and spent it like to oversimplify. And then there's some other stuff that goes on, but that's basically what it is. And so when we were coming into this, you know, let's call, let's call it through January. Household income growth was growing at about three and a half percent or a touch better than that.

How was that growing that way? Essentially zero employment growth. three and a half plus percent wage growth year over year per worker, right? That's how you get that nominal wage growth. US households were spending at about five and a half percent coming into it, on a five and a half percent growth coming into it. How do you close that gap between those two things? Well, essentially it's just mechanical. The savings rate has to fall in response to that or transfers have to pick up,

but transfers have largely been the same through this period. And so what you see there is you basically see that gap widening and widening, which is the labor markets weakening gradually, no acute crisis, nothing crazy, just kind of gradually weakening, spending, trying to stay up as much as possible, driven by that savings rate. And then if you think about, if you sort of work through those numbers, we had five percent nominal spending growth in an environment of three percent inflation, which led to two percent real spending growth. Okay, now let's fast forward. Introduce the oil shock. How does that change things? Well, the labor market.

markets aren't going to really change in the next, you know, in the next day or two. It's just labor markets are like watching pay dry. They just basically can carry on as they are, right? I mean, slowly but surely might move in one direction or another. But basically what we're going to see is three and a half percent wage growth. Real spending growth. The question is, okay, let's just say they keep the saving. You keep that five percent nominal spending. But now we've gone from an inflation environment of, you know, near three to an inflation environment that's going to have a one to one and a half percent increase. And there's, therefore real spending is going to fall.

Those are the numbers. That's the sort of the household math problem, I always call it. If anything, the risk is that households might hold back on their disavings to some extent. What I just described is that they continue to disave, they continue their pace of disavings or the savings rate continues to fall. If you have an environment where stocks are falling or there's more uncertainty or more concern, you might actually see households no longer choose to increasingly to save, and they might pull back on that and bring their spending in line with income. That would be the biggest risk,

because then we'd go from a 5% nominal spending growth environment to say a 3.5% nominal spending growth environment in the context of inflation that could be in the range of 4%. And that's where you get negative real spending growth. And that creates the second and third order effects of on labor markets and incomes in the future. But we're kind of getting our head of ourselves on that. I think a lot of people are getting ahead of themselves on talking about the disinflationary impacts of an oil price rise. The first step is that prices go up, real spending goes down,

and that's where we're at, right? Yeah, I think, yeah, that was a nice little segue into how do people try to understand the sequence of events here, especially if something like an oil supply shock because you look at something like 08, and it's like, well, look, we, you know, central banks should have looked through that and be like, oh, shoot, there's this huge negative growth impulse on the other side of things. So now you have everybody skipping the first

step and saying, we got to go straight to cuts. And then contrasting that with what so far the reaction from central bank pricing has been mostly hikes or, you know, at least less cuts in the case of the U.S. So we're just left to understand how are you thinking about monetary policy within this context? So you have, like I said, you know, the U.S. curve is we had a few cuts. Now we're down to like one, maybe zero. Other countries are looking at even price, beginning the price and hikes. And people will look at that and say, hey, look, we should, we should move to the next phase of things, which is beginning to think about cuts because this is obviously going to be really bad for growth.

But obviously, you need the first to get the second. And I feel like that just needs a better explanation. So I'd love for you to unpack that. Yeah, yeah. I mean, I was writing last night, having gotten a lot of comments. about how oil stocks are deflationary or disinflationary. And the answer is like, of course, reducing household purchasing power through higher prices can be disinflationary, right?

But the question is, how does that, how does that system work? Because what has to happen is the first step is you have to have the prices rise, which eat into the real demand. and capability of the household, which then creates the slowing of labor market growth, which then hurts nominal incomes, which then reduces nominal spending that then has an effect on overall prices. Like, that's the path. And as anyone who's watched the labor markets through time knows, labor markets do not move

that fast. Like they just, labor markets are boring. We try our best, you know, the first Friday of every month to make this thing exciting. Like the answer, the reality is they are boring as hell. And so don't forget that, that they take forever to play out. You know, if we had a reduction in real, say tomorrow, real household spending went down to zero or started to contract. It would probably be nine or 12 months before we would fully feel that effect in the labor markets. And so the point is you got to focus on the first, on first things first here,

as in terms of how this is likely to, to play out. And the first step is you're going to have those price rises. And so central banks, I think part of the story, getting back to your sort of the core of your original question, which is how does central banks respond to this stuff? Like central banks don't ease into oil shocks. Go back, look through all of time on all central banks and how they've responded every single time, like, who cares if you think it's a good idea or not? Like, I don't really care as a market participant as a fiduciary, like what you think they, how you think they should respond is

an irrelevant, a totally irrelevant way of thinking. A lot of people spend time on it. It's totally irrelevant. It's useless. It's distracting. Central banks never ease into an oil shop. Doesn't happen. And so what are we seeing right now? Well, we're seeing what you do largely expect, which is if oil prices are going to get, I don't know, one to one and a half, maybe two percent inflation pressure through these economies, a little less than the U.S., a little more in places like Europe and the U.K., yeah, that's probably worth, I don't know, a couple of hikes over the course of the next year, meaning either going from no, you know, from two cuts to zero or from, you know, no cuts to two hikes. That seems like about right if you look back through time. The challenge is that

that will, as I think people understand, will put more pressure on growth, right? But it's the only solution that they have because the biggest risk here, the biggest risk is that these central banks having accepted elevated inflation for five years post-COVID, you know, ease into this oil shock and then what are they going to do? Like let long-term inflation expectations rise radically. There's no way they're going to let that happen. That would be incredibly risky for them to do. So they've got to nip this in the butt and make sure it doesn't have the second and third

or effects through the prices on the economy. Yeah. I guess the big question that people are trying to sort out is how forward looking and efficient is the bond market going to price this in? Because obviously, to your point, it makes sense for initially the short end of the bond market to begin to price in some hikes and some hawkishness. But you would expect potentially to see the long end begin to price in that, okay, well, look, we're having this oil shock and central banks are hawkish into it.

If we're looking at a 10-year bond, maybe it makes sense to start to price in some negative growth outlooks into that. But so far, we've seen the long end of the bond market sell off pretty significantly. I know you've been bearish bonds, bear stocks. So I'd love for you to just explain how you think about how and when the bond market prices in these events and the sequences of them. Yeah, I mean, the long end of the of the bond market, so far what we've seen is sort of the curve move up, basically, as this has happened. And if anything, what we haven't seen is we haven't seen a real expansion and risk premiums in the bond market through this event. I think that's interesting because if you just sort of go back to what caused sort of a lot of the risk in the bond market, what costs the big lifting. bonds was basically this transition in the post-COVID period, I should say. It was a transition

from basically no one in the world ever considering that we would have elevated inflation ever again to a world where people are like, yeah, it can happen. You know, we'll have elevated inflation. And that forced essentially, you know, some risk premium getting put into the long end of the curve into bonds. You know, what I see now is that there's not, people are sort of in that point where they're like, oh, they sort of have memory that inflation is likely to come down to central banks targets over the course of the next year or two, not recognizing that, you know, inflation shocks can often have a life of their own, meaning like if you get an inflation shock into already elevated inflation, just go back to 2022. What did we see? We saw a persistence,

we saw inflation above these central banks targets. for five years, right? We were year one into something that has played out for the last five years. And that was with massive tightening, right? A massive rise in interest rates. Inflation is still elevated across every major developed economy relative to what Senator Banks targets are. So far, we have not seen a recognition that this could extend the life of that dynamic.

And so when I think about what's getting priced into the curve, what's notable is, so far there has not been a meaningful expansion of risk premiums in the bond market that should create steepness in the curve, should create a sell-off in the curve beyond basically just reflecting the fact that we need tighter monetary policy. And to be clear, that's true across the totality of basically financial assets in aggregate. Like risk premiums have not risen very much despite the fact that we've had, we've entered possibly a new environment of elevation, uncertainty and yet, you know, it's hunky dory when it comes to how most investors are viewing financial assets at this point. So, so what's your checklist or signals to look for for when

to flip from being concerned about a hawk of central bank and inflation to demand destruction and negative growth? Yeah, great question. And part of the story that creates the weakness in economic activity that comes from an oil shock is from the fact that interest rates rise. Again, important to recognize the ordering matters. First interest rates rise, then there's a drag on the economy. And so what you need to see is you need to see interest rates on the long end rise enough, and to short end to some extent, but really on the long end, rise enough to start to create a hit to economic activity and also create a hit to asset prices, right, through the discounting effect. And so when I look at the market right now, you know, bond yields right now are basically

where they've been for the last six or nine months, right? The bond yields are like boring, right? You know, if you had just slept through the last six or nine months, you'd be like, oh, we're basically where we were before. So we got to see bonds move to something that's going to be, you know, create a more meaningful hit to asset prices in the economy. So that's moving up towards the five range, say on tens in order to get a more meaningful, drag. Now, I think part of the story here is that there's not a lot of the economy is very sensitive to those financial conditions. So I don't think you have to have bond yields go up to six or seven or eight or something like that to start to create the reversal. I think the cap is

closer to five on tens. And then at that point, that's probably enough of a drag combined with all the other things that we talked about to create, you know, the subsequent downraft and bonds. But again, the ordering, I know it's hard to, it's easy to sort of get ahead of yourself on this thing. But you've got us like linkages are ordered for a reason because they have that ordered effect on macroeconomic conditions. And so I think in some ways we've almost been like so it's like we have a cancer of, you know, of it's like the cancer of QE that people are like, okay, well, then everything's going to be fine. right so why why should I ever worry about anything and the answer is like shit has to get bad before someone does something about it in order to make it fun and like people are kind of looking through that has to be bad in order for something to happen and just assuming everything will be

okay forever and that's just not how markets or economies have worked certainly have worked over the last hundred years let's take a moment to talk about nexo nexto delivers a premier digital assets wealth platform designed to help clients build, manage and preserve their wealth, earn interests on your digital assets, access crypto-backed credit without selling your holdings, trade with advanced tools, all supported by 24-7 client care. Now back in the US, NXO offers new clients 30 days of exclusive World Club Premier Access, that means enhanced interest rates, reduce borrowing costs, and up to 0.5% crypto cashback on trades. Benefits typically reserve for wealth club members and private clients. Nexso is also

expanding its global presence, becoming the official crypto partner of Tennis Australia, the organization behind the Australian Open and the digital asset partner of the Audi Revolut Formula One team. If you're ready to approach digital assets with a more structured wealth strategy, visit nexo.com slash breakdown to get started. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. That's kind of funny. It just reminds me of like 20-22 era when you were fighting the battle of everybody was, I don't know, freaking out about some rules and in a recession back then. And you're like, look, here where we are in the economy, the labor market is pretty good like we need to see the sequence of events to occur before we get to a

point where things are bad and it it sort of feels like a mirroed situation here right right that's right that's um i mean maybe it's just uh it's just kind of a boring uh old macro person who you know writes down this linkage and then this thing and then this thing who studied too many cycles um who who who thinks in order you know in order in terms of how these things play out but um But I think that's part of the advantage, part of the advantage and the alpha opportunities that exist is when people don't think in a disciplined way about the ordering and just rush to one direction or one narrative or one intuition and away from another. I mean, look, when we look at what's going on with the pricing right now, like financial, the biggest thing, if you think about sort of from those folks who are trading markets, what's the biggest thing that oil shocks create? They create a hit on financial asset prices as risk premiums, as the Fed Titans, Central Bank's Titan, and risk premiums expand, right?

That's what they do. And, you know, there's a long track record related to that. And so far, if you look at what's going on with asset prices and aggregate, stocks are basically flat and bonds are basically flat since this whole thing has started. Okay. So, like, that is the inconsistency there, which is that across asset markets, people are just not recognizing one you know that the oil shock creates this effect and they're rushing to the resolution down the line well said all right so i want to i want to zoom out to the

global economy and how this oil shock is hitting different countries how it gets reflected in their currencies and really divide it between countries that are importing energy versus energy exporters because you know you have asian asian economies or the european economy that that are big energy importers and especially acutely tied to the straight-of-form use versus a country like the u.s which is nearly energy independent as has very little exposure and dependencies on the straightforward use and what flows through it and i would just love for you to unpack like how does that get reflected in the impact of those economies and then how does that get shown in these currencies between energy importers versus exporters yeah i think it's been one of the most chance

challenging circumstances this year is for the first, whatever, two months of the year, the overwhelming narrative and market action was, you know, rest of the world stocks doing well, certainly better than expectations and the U.S. trying to keep up and the dollar being a bit soft. And then we have this thing that happens that basically runs counter to like all of that underlying trend that had existed before. I thought we were going to talk about, you know, de-dollarization when we originally scheduled this. You know, it's going to be an update on that conversation from last year. And it's very much the opposite for exactly the fundamental reasons that you describe, which is, look, Japan and Europe are in bad shape when it comes to big oil price rises.

That's just all there is to it. Across the developed world, they're very sensitive to these things. and other jurisdictions, particularly Canada and the U.S., are in a lot better shape to absorb these dynamics. And so it's not that surprising that we've seen one heck of an unwind of the foreign stock versus U.S. stock story in response to this, as well as, you know, some strength in the dollar. It's not a huge strength relative to what we've seen in the past, but it's still meaningful. And I think that's a combination of the fundamentals. Plus, I think a lot of people got caught off sides. it's, you know, people kind of all in on one direction and got whipped back in the other direction.

At this point, I look at things and I sort of say, look, broadly on a relative basis, whether you're looking at, particularly when you're looking at stocks, we've largely priced in the differential effect of these dynamics, you know, Japanese and European stocks have come back a ton, basically erase their gains for the year. The place in aggregate that doesn't make sense, I'd say, is around the aggregate pricing, meaning like aggregate stock prices across the global economy. Those have come down a little bit, but particularly when you add in the U.S., you know, we haven't seen a huge hit to aggregate asset prices in the way that we, you know, even, we haven't seen a quarter of the hit to aggregate asset prices that we saw during the 22

episode, even though the shock that we're seeing here is certainly on par with, maybe even a bit a bit more significant. And then when it comes to currencies, you know, the real risk in the currency market is, you know, I think, again, it's largely played out as you'd expect from the fundamentals with the dollar being favored relative to these other currencies. It is, you know, the part of the story of what has driven these foreign asset markets is, you know, a lot of U.S. investors looking elsewhere outside of the U.S. to more cheaply valued asset markets.

markets. If that really starts to unwind, you could create another dollar squeeze scenario, which would be very detrimental to asset prices in aggregate, somewhat foreign asset prices, but really asset prices in aggregate as sort of the dollar wins. And I know you guys have been talking about that in your weekly conversations. You know, the dollar shock, we should not totally forget the risk of a dollar shock in this whole story. And you start to think about that from a risk management perspective that you might have a lot of risk if the dollar, you know, pushes higher here. Yeah. I mean, like just if you take what's priced on central banks at face value right now, it just seems crazy to me that we're in a situation where like we could see the Bank of England or something hiking while the Fed is still on a cutting bias.

Like does that, is there any evidence of that even being like something that occurs? I can't even imagine the impact on currencies if that actually plays out. Well, I think it comes down to it comes down to where like the Bank of England or the ECB are going to be tightening aggressively in an environment where they're experiencing a hell of external drag from rising energy prices, which is probably a way more important story for them than is the incremental monetary policy. I think often people overfocus on relative monetary policies as a story for exchange rate movements. Like, just think about it.

Let's say the Bank of England tomorrow was like, we're going to tighten 100 basis points. You're like, wow, that's a big tightening, right? Well, 100 basis points in yield terms is like a one-day standard deviation. in currency price terms. Like if you just think about it from a total return percent, like is irrelevant, right? It's why like central banks, if they're trying to maintain a currency peg, have to tighten, you know, to a thousand percent or something like that, because you have to be on an annualized basis because you have to be at levels like that

to change the underlying supply demand dynamic of an exchange rate. And so I think probably the relative monetary policy is just going to matter a lot less than the relative macroeconomic effects of the rising energy prices. And those are so disproportionately in favor of the U.S. and Canada to some extent and negative for Europe and Japan that that's just going to drive those currents. That's going to be the much bigger driver of exchange rates ahead. That's a good note. I like that.

The other thing I'm trying to tease out here from, you know, if we have this potential teller risk of it, of amazing. major dollar rally is contrasting that with the price action and potential for gold. You know, when I look at everything that's going on, you would expect gold to rally pretty significantly here, I imagine, but since the shock, it's been bleeding. And I'm curious, how do you think about that? Is it largely something getting caught up short term in this dollar rally? Is it because positioning was so stretched into the shock? or like how's gold playing up for you so far?

And where do you expect that to go from here? Well, gold is a financial asset. And so it's really important to keep that in mind. And so to the extent that there are, you know, you're seeing elevated risk premiums across all financial assets, you would expect gold to be affected by it. You know, not only is gold just sort of generally a financial asset. And to be clear, if you go back and look at how it played out in 22,

which I think is very helpful to see like gold rallies initially and then it sells off a lot. Why? Because rates go up and all asset prices go down and gold is just one of many assets, financial assets. And so it takes a hit just like everything else. And so what's played out here, I'd probably put gold in this. The gold is like the macro equivalent of Japanese and European stocks for the equity allocators in the sense of everyone got bowled up on these things. They generally made a fair amount of money on those things through the first months of the year, then all of a sudden you have the shock, everyone's bringing down their risk and, you know, gold takes a hit just like the European stocks and the, and the, and the Japanese stocks.

From a fundamental's perspective, you know, it's a little bit better situation, better situated than those assets, but it's still part of the sort of overextended positioning that came into this, to this reversal. It's why, and when you take a step back, it's why if you're building a well-diversified portfolio of assets. It's why you can't just, you certainly can't just rely on bonds to be your diversifier equities, which we've learned. But you can't also just rely on gold as a diversifier to your equities in addition to bonds, because in an environment of elevated commodity prices, gold underperforms like all financial assets, which is why you have to have commodities in your portfolio, right? And when I asked people, you know, was doing some of these, some

some CFA events a couple weeks ago, I asked people, you know, how many people have commodities in their portfolio. And it's crickets. And they're like, well, commodities, you know, they don't go up as much as stocks. Why would I ever hold them? Well, for this, this is the reason why you would hold them, right? Because there are going to be times when all assets are doing poorly because quantity prices are searching.

And if you want to have some protection of your portfolio, that's why you have to have some commodity exposure within your portfolio. Yeah, I just want to bring this all together now in terms of when we look at all these asset classes and what they're reflecting. So you have the oil curve is pricing in something that's more significant than 2022. You have bond yields that are the same six months ago. You have equities that are largely flat. Since small changes in currency, some pretty aggressive moves in interest rate pricing from central banks. gold's blood a little bit.

Why do you think there's such a contrast or tension between all those asset classes right now? Is it just like a positioning thing or people in complacency? Are they expecting a talk of like liberation day? What's your, what's your read high level? I think there's some collective amnesia about what's going on, what happened in 2022. And part of that is I think folks have been sort of primed that there's always going to be the next easing and the next easing and the next easing. It's like, you know, QE is like burn, like there's all these burnouts on QE walking around,

right? Thinking that, ah, they're just going to get the next, you know, money hit coming. And this is very different from other shocks. Like, this is very different from traditional growth shocks where the central bank, where central banks are sort of all, all well positioned to, ease into this into a growth shock into a you know external growth shock of some sort it's a totally different environment and so um the combination of sort of that sort of uh forgetting conveniently forgetting about how 22 played out um and then also you know this taco stuff is i think people have really uh gone hook line and sinker i mean for good empirical reason let's say for why taco you

should always be betting on taco in any fall is a good opportunity to buy. But again, a war is a very different thing than Liberation Day. Liberation Day was entirely determined by the, you know, mercurial views of a single person, meaning tomorrow, you know, on the day after liberation day or five days after liberation day, like Trump could just change his mind and then imagine, you know, policy was different and, and, and things like he could, he ran the taco shop. Today, the taco shop is jointly run by two big parties, but really like a dozen parties. And if they don't all agree that we're getting taco ahead, then though, then no tacos will be served to extend the analogy, right? And I think that's one of the challenges. Like, most people have not really,

spent a lot of time studying wars and their effects and things like that because, I mean, really 75 years we basically had no wars by large, like, you know, small wars, not no wars, but basically small wars that didn't matter that much. But wars have a momentum of their own. And we're seeing that in real time in terms of how wars have a momentum of their own. And so it's going to take much more than just a simple, you know, taco for this thing to to get resolved anytime soon. And even, and I think the oil market is really reflecting that because, I mean, people are down there counting the barrels.

You know, they're saying this many barrels and this under this circumstance and this circumstance, and when they pencil out all those barrels, even assuming that there's a high probability of the U.S. is going to try and back down or have an off ramp or something like that, what is it? Like a 60% chance the conflict ends within 45 days. That's a very high chance that a war ends within 45 days. wars take, you know, at a minimum years and often longer than years to play out. You know, when they add up all the barrels, they still have that curve where oil prices are

40% above where they are today. The problem is, you know, it doesn't look like people in the equity market and the bond market are actually counting the barrels. They're lazily thinking about Taco and QE and not thinking about the barrels and what the second and third order consequences are of those barrels. And so that is the gap. And these gaps, and these gaps, happen in markets. This is why you can generate alpha from a macro perspective because, you know, not everyone is seeing the same reality and future reality at the same time. And so I think that's the gap we're seeing. Amazing. Well, Bob, that's a great place to leave it. Some sage advice. Appreciate a lot.

And yeah, great to just walk through these things. You know, there's just endless whipsawes of news headlines right now. So I think it's a helpful mental model for everybody to digest and understand. So thank you for coming on and walking us through. all and I appreciate it. And where can, where can folks go if they want to see more of your work and death? Yeah, thanks so much for having me. If you're interested in my sort of ongoing macro commentary, you can find me at Bobby Unlimited anywhere you can find me or check out my substack, non-consensus, which you noted earlier. If you want to learn more about my day job behind me, check out unlimited ets.com. Awesome. Well, thanks, Bob. Always good to have you on.

Thanks for having me.