Oil Squeeze, Bond Rally and Crypto Patience: Forward Guidance's Weekly Roundup

The hosts open by describing continued market turmoil that, in their view, feels more intense than the previous week. One host notes that being bearish is often mischaracterized as being negative on everything, saying he has been max long for months but not in stocks.

They frame the discussion around macro correlations rather than equities alone, arguing that a bullish stance can be expressed through many different assets.

The hosts point out that bonds had a massive rally that day, with the two-year yield up 15 basis points while the belly of the curve and the 10-year yield fell by about 15 basis points. The Nasdaq was down almost 3% at the same time.

One host calls it a classic risk-off correlation day, and says the move looks like a rotation toward slowing growth, possibly the early innings of a recession rotation.

They also note that the 20-day rolling correlation between oil and bonds has turned negative. Oil and bond yields had moved in lockstep for months, but over the past week oil kept rising while yields fell. The hosts say other variables, including a slowdown in AI-related bond capex, are likely contributing.

The hosts argue that as oil keeps rising, it can reach a point where it acts like a pendulum and begins to hamper growth, taking on an almost deflationary character. The market, they suggest, is trying to determine whether that point is approaching.

One guest says the bond market volatility is notable, with the MOVE-type measure of long-duration Treasury volatility at highs, and that sulfur volatility, meaning the volatility in the oil market, is at its highs even more so than the MOVE. He says almost a full rate hike was priced out of December 2027 futures in a single day.

He also argues that these rotations are violent and that equity markets are unlikely to durably bottom without oil durably topping, which he calls an area that is extremely important and poorly understood.

The hosts say this week was the first time they had seen this level of bid in bonds alongside oil doing what it has done. One host says a lot of it is short covering, since the trade had been getting crowded, but he adds that growth concerns are part of the move as well.

They also discuss gold, which continued to be hit. One host ties this to countries needing to defend their currencies against the dollar and to everyone being short energy, with some dipping into reserves to stabilize markets. He notes that there is little reason to acquire new gold now, but argues that at some point people may expect fiat debasement and debt monetization.

One host argues that the risk to consumers is in refined products, because what individuals, businesses and households pay is the price of products such as diesel and jet fuel, not crude itself. He cites airline costs and pump prices as examples of how this flows into inflation and household finances.

The hosts describe the bottleneck as more in refining than in crude production. They point to damage to Russian and Ukrainian energy infrastructure, the Strait of Hormuz region as a major refiner as well as a producer, and export bans on refined products by a number of countries, including China, that pulled supply out of the market.

Refinery utilization is running close to full, and one host warns this raises the risk of damage, with maintenance cycles being skipped. He cites a figure that the jet fuel refining margin was higher than the cost of the crude input in about 20 of the last 24 years.

The hosts argue that high crack spreads create a more structurally persistent bid and floor under crude prices than an immediate spike would. Refiners that keep buying crude and processing it can earn large profits, which keeps underlying demand for crude firm.

They say this support will last until the crack spread normalizes, and that normalization will take a long time because of other factors. One host says the numbers are hard to comprehend because such levels have not been seen in a long time, with reserves depleted, prices at new highs and no remaining buffers.

One host says everything discussed has been true since March and that macro takes time because a sequence of events must play out. He lists the initial price pop, the drawdown of the Strategic Petroleum Reserve, coordinated releases by different countries, and then enough time for markets to price the situation into longer-dated oil.

Because of this, he says, it can feel as if each stage is a new 'wave two', when in fact it has been one steady sequence. The hosts add that daily navigation is stressful, especially with fake headlines in both directions, and that there is little economic data that week, leaving traders reacting to whatever headlines appear.

The hosts say small caps being down nine weeks in a row was an important signal that many dismissed as a buying opportunity. One host argues that five weeks might be shrugged off, but nine weeks setting records shows something is clearly wrong.

One host says every aspect of financial conditions is tightening. AI stocks had been the last holdout keeping the wealth effect high, and they are now joining the decline. Housing and rate-sensitive sectors rose sharply that day as a short-term rotation, with the Russell slightly green while the Nasdaq fell sharply.

The hosts question whether the decline in mortgage rates, from around seven and a half percent toward perhaps seven or seven and a quarter, would be enough to revive the economy, given that inflationary pressure remains. One host expects next month's inflation report to show further acceleration, and says the rate market has shifted from five hikes to around three and a half.

The hosts describe housing as an absolute nightmare of an asset class right now. Prices would need to fall, but a large group of owners does not want prices to decline, so high mortgage rates combined with high prices have produced little activity, as seen in the pending home sales data.

One host says a clearing event would eventually be needed, but it cannot resolve naturally unless inflation is fully resolved and mortgage rates fall much lower. He says he does not see that happening soon, and describes the situation as a stalemate.

The hosts discuss speculation that the administration may hold off on renewed strikes until after the midterms, then pursue further action. One host says he has seen reports that early polling and voting data are unfavorable for Republicans, and that Israel's elections are next week with Polymarket data described as poor for the incumbent.

The hosts note that politicians often use geopolitical conflict to rally support, and say the question being debated is whether the administration is holding off until the midterms. One host says he does not have a strong opinion on the question.

He argues instead that the market will front-run whatever happens, so the exact timing will not matter as much as people expect, since the market will not wait for the day after the midterms before repricing oil and stocks.

One host stresses that in the last two geopolitical oil breakouts, hundreds of millions of barrels were drained from the Strategic Petroleum Reserve that had capped prices. That capacity is now gone, so when renewed attacks and escalation occur, there is no price-suppression valve. Beyond tweets and jawboning, he says, there is physically nothing they can do to reduce price pressure.

The hosts note that printing money would be inflationary and would increase demand, so it is not a fix. They conclude, mathematically, that the only way out is through, arguing that Iran has no clear reason to stop what it is doing while it is winning.

One host argues that viewing the conflict only as US versus Iran misses its scale. He says the wider conflict, which he describes as involving aid from Russia and China, explains both the magnitude and how difficult it will be to end.

He says the conflict is absolutely not going to be solved in one, two or three weeks, and that the oil curve discussed earlier is beginning to reflect that it will persist.

The hosts then discuss whether shipping costs are reflected in futures prices. One argument they describe is that high freight costs reduce what end buyers can pay for a barrel, which could leave more room for prices to rise if shipping costs later fall with demand. They present this as a debated topic.

One host says commodity cycles usually have geopolitics at the center, with a catalyst that no one could have foreseen months earlier. He describes how, when everything seems fine, a deeper look can reveal far more demand than the supply can meet.

The host notes that he is not a trader and that his background includes helping oil and gas companies finance themselves, which led him to Bitcoin and crypto, since he sees those as commodities too. The hosts joke about needing a guest for technical questions about futures.

One host notes that in 2022 the market bottomed, but the real bull market did not start until late 2023. He says a similar pattern occurred around 2020, when prices stayed flat for many months after the COVID emergency before taking off in 2021.

He argues these processes simply take time, and that a bottoming process can take six to twelve months. He says that even a bottoming process may not be the same as a proper bull market.

The hosts say crypto investors had urged them to exit crypto for metals in January, and that there is now renewed optimism in crypto that may be a little early but probably not completely wrong. One host says fundamentally it is right, with early-stage VC essentially non-existent and an a16z crypto fund rebranded as a frontier fund.

The hosts say small rallies attract excitement and leveraged positioning, and that perhaps a dozen coins may be fundamentally valid. But the trade becomes crowded, often built on leverage by roughly the same people in the order books, and then reverses the next day.

One host says the inflections are correct but too early from a liquidity perspective, and that a positive liquidity impulse is needed. He says Bitcoin reached the mid-80s before being washed out, and that this may need to happen several more times before the market is truly washed through.

Another reason to be patient, one host says, is that the odds are not good for Republicans in the midterms. He says the Senate map is favorable for them, so they could still come out with the Senate lead, but the upside would be small, perhaps one or two seats, while the downside would be a full blue sweep with regulatory risk for crypto.

The hosts say crypto is hard to price precisely because it has been most associated with Republicans and Trump. They conclude that financial conditions are tightening, that the direction of the outcome is clear, but that the path requires surviving the process, and that patience will make the right time more obvious than it is now.