The Breakdown - The Market Reacts to Iran's Attack and Geopolitical Insecurity

Episode Date: April 16, 2024

Crypto and tradfi markets were already getting hammered heading into the weekend, when new geopolitical instability and conflict made things even shakier. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Superintelligent - Learn AI fast. Get 50% off your first month with code "breakdown" https://besuper.ai/ Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, April 15th, and today, well, we are talking some serious geopolitics and their implication for markets. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, we have seen some fairly choppy markets over the weekend, and then coming into this week, and it seems like part of the answer, at least, is some of the things going on in the wider world. Over the weekend, Iran launched an attack on Israel, escalating the

conflict in the Middle East to a new level. Hundreds of drones and ballistic missiles were used in an attempt to overwhelm Israeli defenses, or at least to put on a big show of it. The Israeli military reported that 99% of projectiles were shot down, acknowledging the assistance of partners in the defense operation. The attack was a retaliatory strike after Iran's embassy in Syria was destroyed earlier this month. That attack caused seven casualties, including members of senior leadership of the Iranian Armed Forces. Israel has not admitted that they were behind that attack but are widely assumed to have been. The show, of course, is not about geopolitics. It's not about the situation in the Middle East.

Although if anyone has a show in the Middle East and wants to invite me on to talk about that, it's obviously a personal interest of mine. What we're talking about is, of course, market implications. And the main thing on that front is that this is a serious escalation. If you were on social media at all over the weekend, you probably saw breathless coverage about how this was the start of World War III. And even if that's not the case, it does mark an important moment. For their part, the White House has stated that it will not get involved in offensive operations against Iran, but has reaffirmed, quote, America's ironclad commitment to the security of Israel. G7 leaders demanded that Iran and its proxy cease their attacks, which they said, quote,

risks provoking an uncontrollable regional escalation. Iranian military leadership suggested the escalation could end here, stating that the attack, quote, has achieved all its goals, and in our view, the operation has ended and we do not intend to continue. However, they warned that further attacks from Israel would be met with a, quote, decisive and much stronger response. Israeli officials, meanwhile, have decided that a response is warranted, but are still determining its scope and timing. Hardliners within the government are a little less reserved, with national security minister, Ben Gavir stating that Israel should, quote, go crazy. Ultimately, the uncertainty in how

much the conflict will ramp up is weighing on markets, which respond to uncertainty, frankly, more strongly than known bad outcomes. And unfortunately, this is exactly the type of conflict which can spiral out of control. But what about specific impacts? Well, oil markets are the most directly affected anytime conflict in the Middle East ramps up. Prices had already been climbing, and they're now up 17% since the beginning of the year. Brent crude, the global benchmark contract reached $90 per barrel last week for the first time since October. Experts suggested 10% risk premium was already embedded in market prices. So far, this, was largely influenced by the blockade of the Red Sea and forced by Houthi rebels, and these attacks

now increased risk for shipping that passes through the Strait of Hormuz. This chokepoint to the Persian Gulf carries around one-fifth of global oil supply. On Saturday, Iranian military forces seized a container ship in the region which they claimed had links to Israel. At this stage, the simmering Middle Eastern conflict hasn't meaningfully impacted oil supply. Price increases have largely been a reflection of increased freight costs and increased demand as shipping is rerouted onto longer voyages. Giovanni Stanovo, an analyst at UBS, said, might spike at the opening, as this is the first time Iran struck Israel from its territory. How long any bounce will last will also depend on the Israeli response.

There was no major spike once markets opened, however, leading analysts to suggest that major risks had already been priced in. A.M. Kamel, the head of Middle East and North Africa at Eurasia Group, said, energy markets will begin to integrate more seriously the threat of the conflict expanding and a spiral of miscalculations. With oil prices already this high, meaningful additional costs will likely have unpredictable results. An increase in energy costs can drive inflation, factoring into logistics and production costs on most goods. However, above these prices, the economic risk is recession, as productive

capacity is reduced in response to unbearable costs. The last time oil rose above current prices was in the first half of 2022, likely contributing to U.S. GDP growth turning negative during those two quarters. A wrinkle in oil prices is that Iran itself has recently grown to play a significant role in global supply. Iranian production is currently at a five-year high amid a relaxation of sanctions enforcement. Bloomberg energy analyst Javier Blas wrote, If Biden resumes enforcing the sanctions, it could tighten the market significantly. I'm dubious Biden would take that course of action in an election year. Spare capacity from OPEC plus nations is sufficient to cover a reduction in Iranian supply,

but that replacement process would be complicated politically and logistically. For now, Blas is focusing on hints that increased sanctions are on the horizon, but sees no signs in public comments. Regarding the G7 statement, he wrote, some strong words against Tehran, but also, between the lines, it is imploring Israel not to retaliate. Also notable, not a word about oil sanctions enforcement. In a separate statement, European Commission President Ursula von der Leyen said the group will quote reflect on additional sanctions against Iran, specifically on its drone and missile programs, but again, not a word about enforcement of oil sanctions. The other obvious impact of rising global

conflict is gold prices. Gold has also been in the middle of a strong rally reaching new all-time highs last week. Friday afternoon saw a 3.7% drawdown, with analysts suggesting this was a natural pullback related to traders taking profits and being unwilling to carry positions over the weekend. Since mid-February, gold has surged by almost 20%. Explanations for the rally have been varied, with some looking beyond geopolitical risks to the inevitable Fed rate cuts. What's clear for the data is that global central banks and Chinese consumers have increased their demand for gold this year. Some even suggested that gold might be being stockpiled as an alternative reserve asset for nation states. After the U.S. and Europe seized Russian reserves, there has been a growing

recognition that government issued bonds are subject to seizure. The suggestion that, if a nation state was planning something that could see sanctions imposed, the logical move would be to accumulate gold. Whatever the reason, gold is seeing an extremely strong bid as the need for a safe haven asset increases. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody.

Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin Development. Thanks once again to Ledger for supporting the breakdown. Hello, breakers. Quickly before we get back into the rest of the episode,

you guys might have been following along my journey with the AI breakdown, which is a very similar show to this, but for the artificial intelligence industry. One of the things that I found as I dug into that show is that there was a huge need for better educational resources that were actually practical and useful right away. I've just announced a new company and platform called Superintelligent that's trying to build exactly that.

It's a video platform for learning AI, that features fun, fast, and immediately useful video tutorials. Each video tutorial is around five minutes and comes with a step-by-step how-to that gets people actually using the tools that we're talking about. We've just gone live with more than 300 tutorials and are adding 30 to 50 more per week. To check it out, go to B-super.aI. That's B-super.a.I. Can't wait to see you guys over there. On a crypto-related note, tokenized gold traded at a massive premium to the underlying metal. Over the weekend, Paxos Pax G token spiked to a 20% premium as the Iranian attack was underway.

The premium decayed on Sunday but was still present into the evening. A Paxos spokesperson suggested the dislocation was due to traditional markets being closed, stating the main spot gold markets are only open from Sunday at 6 p.m. until Friday early afternoon. When events occur globally over the weekend, the price of gold could not be referenced against the main spot market because it is closed. Gold has been very volatile recently and even on Friday, gold traded in a $100 range, which is virtually unprecedented. U.S. stocks had already sold off hard during Friday trading, with the S&P 500 falling by 1.5%.

This was the worst session since January, suggesting a flight to safety was already in effect prior to the weekend. S&P 500 futures were up during Sunday night trading, and positive momentum carried through into the Monday Open, but stocks are still down significantly from last week's levels. Our small corner of the global markets was one of the hardest hit, with Bitcoin plunging below $62,000 during the attack. Bitcoin had already seen a 7.8% drawdown on Friday afternoon, which is compounded by an 8.4% collapse on Saturday. Prices recovered a little overnight, but for many traders, this move was a flashback to major Bitcoin crashes.

Some compared this collapse to March 2020 when markets broke down and Bitcoin plunged below $4,000. The main take from veteran traders, however, was that this comparison is ridiculous. TXMC tweeted, Anyone who is actually in a live market environment in March 2020 remembers that feeling and not a single one of them will say yesterday was similar, at all. If you knew that fear, you'd know you haven't seen anything like it since and maybe never will again.

March 2020 was a 45% crash in a single day which caused a liquidity crisis in crypto markets. Compare that to Saturday's move, which, once the bottom was in, the drawdown total 13% spread across two days of trading. That's not nothing, but is the kind of move well within the range of bull market corrections we've seen during previous cycles. The height of the weekend panic even drew some posters out of retirement. GCR, who hasn't posted in almost a year, tweeted, if you've been sidelined, believe this is a good opportunity to scale into high conviction tokens. If you're fully invested, just survive. Hold your spot positions and do not capitulate. Someone once said, liquidations are a forced transfer of wealth from traders who need leverage to

wealthy spot buyers. I was enjoying retirement from social media, but don't want to see my brothers get shaken out when the future is still so bright. The liquidations were absolutely brutal, with $1.5 billion in long positions vaporized across Friday and Saturday for all crypto pairs. One of the most notable things about the weekend collapse was the dispersion between Bitcoin and all coins. While Bitcoin was down badly, the long tail of all coins were, oh, I was laterated. Aggregate open interest in all-coin purpose was cut in half, suggesting a huge amount of derisking by leveraged traders. Bitcoin dominance reached 55%, its highest level since April 2021. Dan CryptoTrades tweeted, the actual hit to Bitcoin was very minimal and the total downside

also wasn't very relevant. The real damage was done in the all-coin sector, which wiped out billions of open interest and made for Wix up to 50%. While it's hard to draw conclusions from a single drawdown, this price action could indicate that Bitcoin has a slight premium as a safe haven asset, which frankly you would expect. Now that the weekend is over and it seems like tensions are simmering down, many are calling for the bull market to resume. Bitmex co-founder Arthur Hayes tweeted, That was the dip. Now we rip.

Economist Alex Kruger suggested, Once markets decide the conflict is largely over, we are going to go back up so fast. Don't sleep on this. Analyst empty beer bottle gave everyone some sage advice for the next correction, tweeting, you haven't lost any money if you simply do not check your portfolio. Log off.

More seriously, analysts across the crypto and traditional worlds came to a common conclusion. Sven Heinrich of Northman Trader tweeted, Whatever happens, they're going to print so much money. Allcoin Psycho added, This proves the market has been conditioned to think any global inconvenience may result in printing money. Don't be surprised if news impacts the stock market the same way it did during 2019 to 2021. Pavlov smiling in his grave somewhere.

Aside from market crashes in conflict in the Middle East, there's some other macro issues in motion. Last week, Treasury Secretary Janet Yellen visited China to raise complaints. of manufacturing overcapacity. She has traveled to China multiple times over the past month, but there doesn't appear to be a resolution coming. Yellen said, We're concerned about the possibility of surges in Chinese exports to our markets in areas where they have a great deal of overcapacity. I've been very clear in my discussions with them that this is a concern not only to us, but to other countries. The main concern is heavily subsidized sectors

like green tech and electric vehicles. We're now at the point where Yellen is going on the record to accuse China of unfair economic practices, and it's clear that trade restrictions and tariffs are on the table. Meanwhile, sanctions on Russian metals have been ramped up, with the U.S. and UK banning delivery of supplies produced after midnight on Friday. Aluminum and nickel saw a dramatic response once trading opened in London. Aluminum jumped by 9.4% while nickel spiked by 8.8%. Russia is a major part of global metal production representing around 5% of nickel, aluminum, and copper supplies. Aside from raw commodities, Russian firms are also a key supplier for refined metals suitable for delivery on financial contracts. As an example, Russian aluminum accounts for 91% of the

deliverable stock on the London metals exchange. Alongside ramping oil prices, these issues could spark another wave of inflationary pressures in the West. More structurally, the events of the past week look like the Balkanization of global trade is only increasing. Earlier this month, Yellen explained the breakdown in trade theory stating, People like me grew up with a view, if people send you cheap goods, you should send a thank you note. That's what standard economics basically says. I would never again say send a thank you note. So friends, that is the story from here, really interesting times. Obviously, we'll have to keep watching and see what happens with the Middle East. The specific tension might be simmering down,

at least from where it could be, but that could change at any time. For now, I want to say one more big thank you to my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. 5% of all purchases will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.