MacroVoices #530 Daniel Lacalle: China and The Us Will Decide The Outcome of The Iran War

“I think it's staggering, to be fairly honest, but I think that there is a fundamental reason. It is that money supply growth is soaring. We have the fastest money supply growth since 2021 globally, led by China. But also in The United States, Europe, a little bit more subdued. But in The UK, it's also soaring. And that, obviously, considering that the war is generating a significant impact in investment decisions, consumption decisions, credit demand, etcetera, all those things are reducing money velocity.”

“But the problem is in Europe. The big problem is in Europe. It's also a problem in Australia. In 2022, we had a very, let's say, benign outcome of the beginning of the Ukraine war. And a lot of countries, instead of taking that as a warning signal, particularly in the European Union, warning signal. We have to make an extra effort to guarantee our security of supply, the flexibility of our sources, etcetera. Instead of that, what they did was to think it was a a policy success. And, obviously, now we read that, Europe has basically a a few weeks left of jet fuel. It's not going to run out of jet fuel. It's going to pay five times what it usually pays.”

“I think that both The United States and China can wait for quite a bit of time. China, as you have rightly mentioned, has the largest stockpiles of a of any essential commodity that they need. And on top of that, they have banned the export of, petroleum products and other critical, elements in this in the supply chain right now. In the case of The United States, The United States is now the largest oil and gas producer in the world. It is exporting record levels of petroleum products. It's at net exporting of 2,800,000 barrels a day.”

“One of the most fascinating elements about this change in the global landscape of energy that I just mentioned, The United States going from being the largest importer of oil to the largest producer of oil, is that the US dollar in this crisis has behaved like a petro currency. It has basically risen when oil prices were rising. And if you look at the correlation between the dollar and oil prices, it's been almost phenomenal.”

“Particularly in the past eighteen months, a lot of us saw that there were a lot of positions being built in the market with very little equity, very leveraged positions on gold using as a source of funds, the US dollar. So long gold, short the US dollar because it's been a phenomenal trade. And because it's been a phenomenal trade, a lot of people were putting less equity and more debt. So what happened is that once the geopolitical risk scenario got worse and people starting to demand more dollars, the dollar stopped falling. So margin calls started to appear. A lot of people had to sell their winning positions in gold in order to reduce their losses.”

“The geopolitical risk premium that oil prices completely lost in the past three years, which was an abnormality, to be fairly honest, It's not only back on that it but it may probably last for a prolonged period of time, and that's where we have to focus in my view. What is really concerning for me is that the forward curve is discounting that oil prices will still end up much higher than they were in January by December 2026 and December 2027.”

“The news that hit the tape after I recorded the interview with Daniel Lacalle was The UAE, United Arab Emirates, pulling out of the OPEC alliance. That's really, really big news. My initial interpretation of what's going on here is The UAE has been complaining for years about what it considers to be unfair quota apportioning. What this move signals is UAE is saying, baby, when this thing is over, we are going to produce, produce, produce. We're not gonna worry about any quotas. In the long run, the bigger picture here, I'm absolutely convinced, is that spare capacity is history.”

“Our good friend, Jim Bianco, pointed out on x that Iran does have a sort of nuclear equivalent environmental option, which is if they run out of storage to put that oil in, they could just open a pipeline someplace and start pumping that oil into the ocean. That would be, obviously, an environmental disaster if they were to pump, you know, more than a VLCC, several million barrels of oil and just pump it overboard, it would pollute the environment, and it would put all of the neighboring countries' desalination assets at risk.”

“My theory, though, is that just like the pandemic, what's going on here is people are going to stay in denial because they've never seen anything like this before, and they're just not gonna believe that what is clearly inevitable is actually happening until it has already happened. In other words, the lag effect of global transit times. The oil takes several weeks to travel to its destination from the Persian Gulf. Well, we're finally getting to the point where those effects are now being felt.”

“Now, as always, in Europe, we always have politicians that will find any excuse to go out and say, hey. Let's put windfall profit taxes on precisely the companies that could actually support the improvement of security of supply and invest in the flexibility of the system in order to avoid challenges like this. So that, unfortunately, is less less, I would say, consensus. So there's more of a consensus of putting more taxes rather than than price controls.”