James Alexander Booth
James Alexander Booth
United Kingdom
2mo
Oil Scarcity, Phase Transitions, and the Slow-Motion Market Meltdown In physics, water can absorb a surprising amount of heat without drama. Keep adding energy, the temperature creeps up, and then—bam—phase transition. One moment it’s a calm liquid, the next it’s steam ripping the lid off the kettle. Financial markets are likely to behave in much the same way over the coming period. Nearly a billion barrels of oil have been lost from the global supply since the Hormuz closure. Industry buffers built for exactly these scenarios have been drawn down hard, cushioning prices for now. The action still feels relatively orderly. That’s the deceptive part. Scarcity hasn’t yet triggered acute stress in developed markets. When it does, it will probably arrive in a narrow window, just like boiling water. One day tankers are rerouting and everyone’s coping; the next, aircraft are grounded and jet fuel will be trading like Bitcoin in 2021. I’ve always been surprised at how quickly markets flip narratives. We went from maximum panic over oil to maximum complacency in short order, with tech stocks hitting new all-time highs. Oil still gets the occasional mention, but NVIDIA gets far more airtime. I’m predicting another sharp flip back to the energy crisis, as the world economy’s fuel tank runs dry and it's engine starts to sputter. Resolution is not out of reach. The stoppage in Hormuz is ultimately resolvable. But because markets remain sanguine, the urgency to compromise is lacking. The real sticking point is Iran’s nuclear program. Tehran wants legitimacy and security guarantees; Washington wants to avoid a nuclear-armed player in a volatile region. A credible monitoring regime with teeth could bridge the gap, yet politics make such a deal unacceptably toxic for both sides unless greater pain in applied. That’s where financial markets will eventually apply the necessary pressure. We all know Trump treats the stock market like his personal economic Fitbit — a real-time readout of how well things are going. Right now it’s not screaming crisis. However, developed-market bond yields are melting higher, hitting multi-year highs. Bonds lead, equities follow. History suggests this quiet creep in yields will accelerate untill it grabs the attention of the stock market and drags stocks low enough to inflict the required pain. When the pressure becomes unbearable “impossible” deals suddenly become possible and deals get done. Then phase transition will reverse — from acute stress back to manageable scarcity. The time to buy will be at maximum pain, that's when the market offers great value. Until then, we sit in that uncomfortable middle ground: nothing dramatic has broken, yet the temperature is clearly rising. Markets hate uncertainty, but they absolutely love resolution. This slow-burn pressure cooker is unpleasant, but the heat needs to rise sharply to catalyse action. Nobody wants a crisis, yet periods of maximum pain in financial markets serve a purpose. Things get done. This time will be no different. I can't rule out a resolution without a crisis, but I'm a betting man and I take my odds from financial history. I continue to hold positions in stocks, which represents my view that we could get an unexpected resolution and that there are currently attractive opportunities. I also hold cash representing the probability of a superb opportunity materialising out of a forthcoming crisis. Regards, Jim
Not investment advice. The author may have financial interests in the mentioned instruments.
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