Can a ceasefire in the Middle East bring complete peace of mind? What should the market pay attention to in the future? 【New York Talk38】

“New York Talk · Season 2 Frontline Insights from Wall Street”

Introducing our guest expert teachers for this column:

Hello, Wall Street Insights and New York Talk users. It’s great to meet you all. Today is April 7. I’d like to share some thoughts on the market disruptions at the end of the last quarter that I discussed in the previous episode, the impact of the “America First” policy in this event, and several possible paths for how the Iran conflict may evolve.

First, I’ll talk about the disruption event mentioned in the previous episode—quarter-end turbulence caused by options trading—and how it amplified some information related to the Iran events that followed. In addition, we’ve discussed the “America First” policy many times before, including the contradiction between “American superiority” and “American isolationism.” In this war, what views do people actually hold? And what impact will it have domestically within the U.S.? After laying that groundwork, I’ll then discuss several possible evolution paths for the Iran conflict.

We know that the entire market reached a low point earlier on the Friday. Then around March 30 and 31, the market saw violent震荡—especially on the 31st, when the market bounced sharply. Looking at this chart—something we shared before too—S&P 500, Nasdaq, and Russell 2000 all fell by about 7% each in March. In the end, the last day rose a lot; of course, it also fell quite a bit again—down over 5%. Nasdaq fell by nearly 5%, and Russell also by around 5%. On April 1, the market continued to rebound somewhat. So overall, it was a fairly intense rebound, mainly happening on March 31 and April 1.

In our previous lesson, we specifically mentioned that at the time there was a particularly special options effect. We also talked about how some CTA trading might have turned around during that period. As we discussed earlier, if CTAs start to turn, unless the market’s macro backdrop is exceptionally strong, sometimes there will be a rebound process. So we discussed this topic back then too.

At the end of the previous episode, we said that just on the third-to-last trading day, JPMorgan’s collar trade entered its protection price—below the then level of 6475. In fact, at that time it was a bit above 6300 points. We believed that the 6475 level was like a “magnet,” and since that week was a short week with only four trading days, this “magnet effect” might be amplified by macro signals. In practice, this did happen.

This matter is also related to the Iran situation, so let’s first review what happened on the 30th and 31st. On the 30th, Trump threatened Iran on social media: if it didn’t reach an agreement, he would destroy facilities such as power plants and oil wells using various means. Also, U.S. B-52 bombers flew over the airspace to demonstrate strength. At that time, the market reaction was not big, because the market was trying to bounce, but at the close it didn’t really bounce much.

But what happened on the 31st was important. On the 31st, news came out that the allies could resolve the issue on their own, and the U.S. side believed the problem in the Strait of Hormuz would resolve itself. It also expressed the U.S.’s willingness not to get involved in the Strait of Hormuz passage issue. These pieces of information came from reports such as The Wall Street Journal, quoting statements from White House staff: even without announcing the reopening of the Strait of Hormuz, the war could be ended. These angles made it seem as though the U.S. might have a possibility of directly withdrawing troops.

This led to the quarter-end signal amplification effect we mentioned earlier in the market. In the end, the quarter still fell by quite a bit, but the rebound was extremely strong. As a result, JPMorgan’s collar trade closed at 6582—higher than the 6475 level. It went from a little over 6300 points to 6582 in essentially just one day, rising very sharply. That’s what was going on at the time—on the one hand, there were de-escalation signals from Iran; on the other hand, the market structure caused this kind of走势 on the final day. That’s also the scenario we thought could happen then.

I’ve talked about the “America First” policy many times before. At the end of last year and the beginning of this year, to set up the market analysis for this year, I specifically revisited some of the contradiction points between the “America First” policy and America’s isolationist policy. So in episode 28, I discussed a few points and also listed some names. Including in June, whether a war between Iran and Israel would break out—back then, several people heavily criticized the war option, and many of them were from America’s traditional conservative forces. The best-known of course are Tucker Carlson and Steve Bannon, along with Megyn Kelly, Candace Owens, and Representative Thomas Massie. On the other side—those who support striking Iran and support Israel—include Ben Shapiro and Mark Levin. Of course, we know Trump supports Israel. We discussed this topic at the time as well. In fact, these debates basically revolved back and forth among these people in many ways. Next, I’ll update what has happened up to now.

Back when we discussed the “America First” policy and the dollar system, we mentioned a few points. The U.S. financial system is one of the important advantages of the dollar system. Because on the one hand, the dollar system loses a lot of job opportunities, but at the same time it builds a huge financial system. We also mentioned that the dollar assets held by U.S. allies are one of the key factors stabilizing the dollar system. So if this matter gets damaged, there will be problems.

When I talked about this issue, basically I said: if the “America First” policy could expand the scope of allies and expand America’s influence, that would be positive for the dollar system; conversely, it would be negative. We also discussed how the tariff and trade agreement reached with Japan actually increases the advantages of both countries at the same time. But as for Europe, it’s harder to say, so we discussed those situations then too.

In the past, when the U.S. entered a war, it often meant expanding its influence and bringing some expansionary policies—which is usually good for the market. When we recorded the show, it was early January, and the Venezuela incident had just happened. So we thought, we need to observe this.

With these setup points about the “America First” policy and the dollar system, let’s look at what the current situation is. First, the voices that oppose and support this war come from almost the same group of people, but their wording is extremely strong. Including Tucker Carlson. I listened to some of his reports yesterday, specifically about Trump—this isn’t in the table I made. On Easter Day, Trump said a very dirty word—insults. Tucker Carlson found that extremely offensive, and he also said that this is something that has no place for a Christian to do. So I’ll quote what he said earlier: he thinks this war happened because of Israel’s needs—this isn’t America’s war. Megyn Kelly also said she was extremely angry about the fact that American soldiers died in battle, and she also believes this is 100% Israel’s issue.

Joe Rogan, he’s a talk show host and also a highly influential figure in the podcast world. In the final moments of the election, he helped Trump win a lot of young white male voters’ support. He was very disgusted about this, saying Trump had betrayed his promises, and he said it directly in that kind of way. Then Mark Levin from the pro side said that Tucker Carlson, Megyn Kelly, Candace Owens, and others are helping an enemy country, and they’re actually hostile to Jewish people. Then Ben Shapiro—of course—firmly supports the war. Up to now, the Republicans and Democrats—Democrats on the surface don’t really support the war, but in fact there are many supporters as well. Republicans obviously express support.

But there’s a problem inside the U.S. government itself. In a previous video meeting, we also discussed how this war has been promoted in the U.S., how and why we need to do it, and why we need to get public support—this wasn’t prepared well. The basic thinking back then was to suddenly launch a surprise move and maybe it would end—maybe there were such whimsical ideas. Of course, that isn’t completely impossible, but that thinking showed some issues in the preparation for follow-up actions, including problems reflected in the public’s opinion groundwork.

We see the results now: in polls, most people oppose the war, and support is far less than opposition. At the same time, among independent voters, opposition is overwhelming and one-sided. Although support appears to be relatively higher within the Republican Party, we can still see that many very traditional Republicans actually oppose it. So how accurate is all of this information, and what is its impact, is also worth questioning. I won’t go through all the details one by one, including reports by Reuters, Fox News, and many others, all saying that an overwhelming majority are against the war.

In terms of Trump’s support, it’s low—only in the thirties. Support among independent voters for him is only in the low twenties. So that’s all unfavorable for the midterm elections.

Then within MAGA—because after all, many people here are Republicans, and some think of themselves as MAGA while others as traditional Republicans—reportedly 90% support the war. But the key figures I just mentioned are also all MAGA. So exactly how high the proportion is and what the impact is is still something to observe. For non-MAGA Republicans, the support proportion is very low, which proves there’s a problem with the Republican Party’s base. On the Democrats’ side, the proportion opposing the war is absolute—an overwhelming majority. So this situation is already affecting the U.S.’s potential midterm election problems. Of course, we also know there are issues with oil prices and the problem of rising prices for all kinds of things in the future, so the impact will gradually expand.

When we discussed the “America First” policy earlier, we also mentioned a very important point: expansion of allies. If the U.S. gives allies benefits and then the U.S. system and the dollar system expand, that brings benefits. But we also know that this war has brought huge costs to many of America’s allies. This includes various economic forums and analyses by countries: they say allies’ losses may pose a severe challenge for the U.S. in gaining alliance support in the future. And currently, we also know Rubio and Trump often talk about us wanting to withdraw from NATO, which makes the issues even more complicated. All of these could bring future challenges to the dollar system and the U.S. system.

Now let’s talk about the energy crisis. Europe’s natural gas inventories were already relatively low. In addition, earlier in March, Iran attacked Qatar’s LNG facilities once, so Qatar’s LNG facilities also announced force majeure. That day, natural gas prices surged sharply. U.S. natural gas prices are relatively low, but Europe’s prices surged. The Dutch TTF benchmark has already risen—by the maximum, it doubled compared with March. In addition, many companies increased various energy surcharges. These kinds of developments will affect central banks. We discussed this last time too: many central banks may think inflation is the main issue, and they will start raising interest rates. Including some economists beginning to discuss the possibility that some major European countries could face a technical recession.

Then the U.K.’s situation is also more complicated. These are all things we previously covered during the interest-rate-hike process, including Japan and East Asia. Because we previously said Japan is tightly linked to the U.S. in a relatively close financial system. But now, due to energy hits and transport disruption, it will lead to many problems for Japan. South Korea is similar, which causes LNG prices in Asia to surge as well. South Korea also launched some emergency measures. Japan’s issue may be similar in the future: on the one hand, prices rise and it may raise rates; but on the other hand, the economic problems could be severe, putting it in a dilemma—similar to the U.S.: one side is economic problems, the other is inflation problems.

Of course, this problem is even more pronounced for Asian countries. So overall, the simple summary is: allies have suffered massive losses, which deviates from the effect that should be produced by the dollar system expanding under the “America First” policy. This matters for our later possible inferences and for future risk. Of course, I believe the U.S. will ultimately prioritize internal political elections, and the impact on allies seems secondary. But in any case, it could have long-term implications for U.S. markets.

Possible scenarios and evolution paths of the Iran conflict

Let’s talk about the possible evolution paths for the Iran conflict. My order is based on the chronological order in which the public discourse started discussing them. The first is something Trump himself said: at the beginning of the war, he believed the Iranian regime would need to be replaced—at that time, the goals of Israel, Iran, and the U.S. were aligned this way. But we know the probability of this is extremely low. Still, this possibility exists. When could it happen? The current situation is that Iran has replaced some people. Among them, indeed, many senior commanders have been assassinated or died in battle for other reasons, which leads to many variables. But this possibility isn’t completely impossible, and for now it doesn’t seem ruled out—because the shock power is big.

So what is the path of evolution in the future? If there is extremely intense fighting, and leads some people to strongly oppose a U.S.-Iran reconciliation—and maybe they die in battle—then internal circumstances could change. But in any case, this possibility cannot be ruled out completely. Especially after the war continues to escalate, or escalates fiercely. If this happens—say, the Iranian regime is replaced, or a regime emerges that is very close to the U.S.—then it’s equivalent to saying the “Pax Americana” position we talked about becomes consolidated. That would be good for the U.S., and definitely bad for America’s potential adversaries. We discussed this many times: the overall trend of the U.S. entire dollar system is downward. But if this happens, it would actually be good for the U.S. Of course, this is an extremely low-probability event; for now we can only see, after a series of escalations in the fighting, whether there’s any chance it evolves into this path.

So what is the current situation? Iran has controlled the Strait of Hormuz, and the U.S. and Israel continue to carry out airstrikes. The intensity of the airstrikes is mainly direct strikes on military targets, and of course they also strike some civilian targets. But there have been several times where strikes on energy facilities were stopped or halted, so this area seems intentionally restrained. This is the current state. This can be maintained for some time. But we also know that maintaining it will worsen global inflation, supply-chain pressure, and liquidity pressure. We discussed this topic before as well: after it continues for a while, it can evolve into several other scenarios.

First, let’s talk about what markets have been especially focused on in recent days: Trump may unilaterally declare victory. Everyone knows TACO stands for Trump Always Chickens Out. This idea is actually also one of the reasons the market rose a lot on March 31. But Iran would definitely also declare victory, because Iran believes that since it controls the Strait of Hormuz, the global influence it brings is bigger than that of any other country over a long period. The reason this possibility is rising is because in several conversations, Trump has said on the one hand that we should strike Iran and bring it back to the Stone Age; on the other hand, there are many signals that we can negotiate through other countries. And since both sides currently indeed may have negotiation prospects, this possibility is increasing.

In this process, we said there could be a very short pause period, which would allow both sides—or multiple parties—to build up their strength. And it can’t be ruled out that fighting might restart in the future. If this happens—if an agreement is reached, whether it’s a temporary ceasefire or both sides have a clear intention to go in that direction—then near-term liquidity would be positive. So it would allow the whole system to recover somewhat, including the technical rebound we saw in the past couple of days, which has factors related to this. Bond yields also dipped slightly, which is also related.

But we know the end result is that Iran controls the Strait of Hormuz. This outcome would deal a severe blow to the credibility of “Pax Americana” we just discussed, bringing long-term and very large harm to the U.S. That brings us back to many issues we just talked about. We also said that domestic politics in the U.S. and the inflation problem may not be solved just by keeping the strait open. As long as Iran controls the strait, the inflation problem is already underway and likely can’t come down immediately. Moreover, after Iran controls the strait, internal election pressure will be very high, and allies will also suffer huge losses. So this is long-term damage.

So why did I draw a highlighted mark on point four? I wanted to emphasize this. What I’m referring to is that the U.S. military might actually carry out a military action to control the Strait of Hormuz—at least, making efforts in that direction. Of course, this escalation could also be bombings of facilities—for example, the U.S. has said many times that it would conduct large-scale bombings against many Iranian infrastructure targets. We can see the U.S. military is continuing to deploy more troops. Because the troop deployment after this U.S. decapitation operation has been insufficient, it keeps repositioning forces, and even now it’s still not enough. From this perspective, including both sides saying they want to pause, in many cases it’s a bit like troops are insufficient and forces need to be shifted. So in scenario three—TACO, or both sides declaring victory—this time could be very short, and then it might move into scenario four, i.e., war escalation. This is a part that’s comparatively hard to judge. There is an extremely low-probability event—after all, the U.S. military combat power is strong. If the U.S. suffers a battlefield defeat, that probability would be too small. So I think it’s probably unnecessary to spend too much time discussing this directly, because it’s clearly bad for the U.S. We don’t even need to think about specific details: it’s bad in the short term, long term, and mid-term.

Another possibility—the one everyone is most worried about—is: when the U.S. attacks Iran, Iran launches a fierce counterattack, leading to a disastrous outcome. Regardless of the disastrous result—whether it’s freshwater plants, energy facilities, oil pipelines, or various oil tankers, or any of these, or major civilian facilities—regardless of what outcome either side reaches, this falls under a disastrous result. If it happens, it could be a trend-based rapid deterioration. This would be bad for everywhere globally, and also bad for the U.S.

Of course, another possibility for the war is: by controlling the Strait of Hormuz, or by pressure reaching a certain level—maybe even some people might say the use of new weapons. Whatever the case, it’s indeed possible that escalation of the war could lead to changes within Iran, and then a regime replacement occurs, or the regime shifts toward aligning with the U.S. These angles are all possible.

So my inclination is that, given that if a ceasefire were announced now, there would still be many domestic issues, and it might not help you win the election again. Maybe it’s already the time when the U.S. needs to gain victory by expanding the battlefield and changing the situation. Of course, if it wins, then the situation could become favorable for the U.S.

Market impacts of various scenarios of the Iran conflict

So among these possible shifts, we’ll analyze the market impacts of the same four scenarios in more detail. If there is a regime replacement, it’s clearly positive for liquidity. Clearly positive for the U.S., positive for U.S. equities, and cryptocurrencies would also benefit. Because overall liquidity—and the whole U.S. system—would be even stronger. U.S. Treasuries would also benefit, because one of the reasons for rising Treasury yields is pressure from liquidity as well.

From a liquidity perspective, it’s positive. But from an inflation perspective, that’s not necessarily true. So this is a long-term phenomenon. I still think there will be a positive phase. But what happens later? After all, the shock point is still relatively big, so it needs time to be resolved. For bonds, I’ve discussed many things about TIPS before, because I have significant concerns about inflation.

Also, there’s gold. We’ve also discussed before that gold’s decline and the reason it rose substantially—because it serves as an important intermediary in international trade. This has been going on for many years, especially as China started pushing it. Due to the U.S.’s tariff policy, that process was pushed even harder. But currently, the result is that global international trade suffers losses, and opportunities for the flow of international trade are disrupted. Plus, we know that many holders of cryptocurrencies are private individuals, while many holders of gold are countries. From that perspective, whether central banks’ ability to buy gold can continue at the same pace when liquidity is squeezed—that quantity is also questionable.

So under scenarios where liquidity is positive, in the scenario we just described, gold would rebound. But it’s hard to say long-term. Because if this happens, I might think that it could reduce gold’s importance in the international arena. I’m saying: suppose a regime replacement in Iran happens, and the U.S. becomes “Pax Americana,” becoming stronger than ever. In that case, gold’s importance might decline. Of course, that’s something that may need discussion later. Until that relatively low-probability event happens, it’s not too late to discuss it. I’m writing it down as groundwork.

The current situation with Iran is: the current state we just discussed—controlling the strait, and the U.S. and the U.S. alliance carrying out continuous airstrikes. We know that this process is definitely not good for U.S. equities, and not good for U.S. Treasuries, because it doesn’t help liquidity. It’s also particularly bad for countries that import energy. Everyone knows that under liquidity pressure, it’s also not good for gold. But on gold specifically, I think if it ultimately evolves into increased Iranian control, then to a certain degree it’s a case of ebb and flow—like we said before, there is a relative ebb-and-flow process between the international system and the U.S. system. Gold’s importance in the international system is high, but if this situation continues, the room for gold to fall is limited. So my overall judgment is: under liquidity pressure it will decline, but in the long run, the ability of international trade intermediaries may be amplified further—so I still have a long-term positive view on this asset.

Also, we mentioned the third scenario earlier: Iran actually controls the strait. This can relieve many things in the short term. Many market signals are also related to it, so it would cause assets that fell earlier to rebound. But we know the vulnerability of the supply chain has already been shown, and long-term inflation risks have clearly increased. Those two factors are hard to ignore. Even if this happens, people will still ask: with a fragile supply chain, you will still create new supply demand, and you will still bring more inventory.

In addition, damage to various trading or trade flows creates long-term inflation risk, so this is the problem that would arise. Then back to bonds: I’ve never been particularly bullish on long-end bonds. A big reason is that in this scenario, regardless of inflation or liquidity, long bonds have bigger problems. And even if the market rebounds—like we said before—if this situation persists, then it will be hard for U.S. equities to return to the phase where they lead globally. We judged last August that this situation might be coming to an end—at least that phase. Of course today there are many major events, so we have to reconsider the situation. Under this scenario, U.S. equities are unlikely to return to the phase of leading the world again. Similarly, gold is definitely a long-term positive under this scenario.

Now we come to the hardest scenario. I think its probability is relatively high: a phase where the U.S. and Israel escalate into war, and the U.S. military begins actual military control of the Strait of Hormuz. In this, we also said that if the U.S. loses, it would definitely be extremely bad. But on the other hand, there’s a distinction between long-term strategic success and tactical success in a war. We can only focus on short-term tactical success, and that possibility is still fairly high. So if the U.S. achieves tactical success, once tactical success happens, it immediately becomes positive for U.S. equities and U.S. Treasuries. And once tactical success happens, it opens up the possibility of returning to scenario one—the possibility of a regime replacement. Then this becomes an effect that is more beneficial to the U.S. in a way similar to an option: it could appear. So this is possible, and that’s also where the market difficulty lies.

If this happens, it’s actually positive. But on the other hand, if the U.S. offensive situation becomes too big, or the impact brought by Iran’s counterattack becomes too great, leading to a disastrous outcome, then risk assets would undoubtedly be extremely unfavorable. Meanwhile, risk-free assets—things like Treasuries—would be especially favorable. Because in such an extreme case, it creates a stock-bond “see-saw” effect. At that time, risk is priced too high. I honestly think there’s no simple solution to this, because it would cause massive energy damage, and the losses to the entire global supply-chain system can’t be restored in a short time. At that point, it really depends on how central banks and governments in various countries step in to save the market or rescue the economy with their policies.

So I think we should wait for outcomes for these scenarios, because predicting this is simply too hard. I think scenario four is more likely. In that case, of course, it would be positive for certain assets in the transition phase. I might spend a bit more time discussing this process next time. But during this process, my emphasis is: if this happens, the impact it may bring could be very strong and the trend could be very strong. At that time, it’s not impossible to make judgments based on what actually occurs. That’s what I wanted to say. Thank you all.

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