Turkey’s central bank declined to comment on its activities. No one likes to talk when they’re growing poorer. And as a net energy importer, adjacent to a growing war, Turkey surely is. It had sold or swapped roughly 60 tons of gold in the two weeks since the US and Israel attacked Iran on February 28th. The Turks weren’t alone. Russia’s central bank has been selling too. And surely at least a few Gulf oil exporters have been dumping gold reserves, their supertankers trapped behind Hormuz. Gold is an element, like water, whose state changes at different temperatures. When geopolitics really heat up, gold takes the form of a liquid hedge. But you can’t eat gold or pay bills with it. In a red-hot war, gold changes form in the hand of its holder; the desperate must sell it for what they need. And in Armageddon’s inferno, when government-issued fiat money hyperinflates away, gold returns to its ancient form, as humanity’s store of value and medium of exchange. Anyhow, gold prices are down 15% since the war started, which is the opposite of what the consensus expected. This tells us a bit about the magnitude of wealth destruction wrought across the global economy. For decades, wars have been limited in scope - their impact on overall prosperity has been minimal. And the global economic system has had ample capacity to replace what has been lost through kinetic activity. But this conflict is different. Productive capacity is being destroyed at scale while nations are desperately racing to rebuild redundant infrastructure for national security reasons. This unusual combination lifts the demand for capital at precisely the time when it is being destroyed. And unlike any crisis of the past fifty years, when excess global productive capacity has been ample, fiscal expansion and quantitative easing in today’s capacity-constrained world will not really solve the problem. It will simply lift inflation.

For Week-in-Review and Weekly & Year-to-Date market data, scroll to the bottom.

Alpha: “My trades all worked out, most for the wrong reasons,” said Alpha, PM at one of the big multi-managers. “My bet on higher rates went further than hoped, never expected the catalyst to be Iran,” he said. “But I did get short gold on a capital destruction and financial conditions tightening trade once the war opened up the rate distribution for hikes,” said Alpha. “Saw the potential need for sovereigns to sell down their gold reserves to make up for lost oil revenue, and there was a lot of sloppy retail money in it too,” he said. “Then again, I was probably the one guy who didn’t make money long gold in January.”

Alpha II: “There’s potential for a massive trade that’s setting up later this year or in early 2027,” continued Alpha. “That’s what I’ve focused my analysts on,” he said. “2027 could see nominal GDP growth down to 2% or lower for the first time since 2020, and when you get to that kind of level, you can really spiral down.” There will be a 60bp fiscal cliff in 2027. And if the Republicans lose in Nov, there will be no more stimulus. Even if they win, it may be too late for more fiscal expansion. Capex is the key variable. “The set up for stagflation in 2027 is real.”

Alpha III: “I’ve been bullish on AI capex since 2024/25 because this is not the kind of buildout that the tech CEOs slow down because of a hiccup in GDP growth,” said Alpha. “This is an existential race for these firms, so they’ll spend the money unless they’re forced to pull back because credit markets close and/or profits shrink meaningfully – the risk next year is that both happen,” he said. “With GDP growth slowing with significant downside risks, disposable income will fade, corporate income too, yet inflation could remain sticky.” Negative feedback loops swirl. “It’ll could look like some smaller elements of 2001 plus 2008 - add those together and you get something pretty bad.”

Alpha IV: “I ask my analysts what to buy in that environment,” said Alpha. “It’s a good exercise even though it’s hard, because it forces you to understand the problem in a different way,” he said. “They conclude we buy gold. But that’s the wrong answer.” Gold is not a simple stagflation trade. “Stagflation isn’t a natural phenomenon; it requires policy mistakes. So, you need to trade it as two cycles in one,” he said. “For instance, imagine a world where (1) the Fed tightens, (2) the market prices the tightening, and (3) investor concern then focuses on slower future growth.”

Alpha V: “Then imagine (4) inflation isn’t really anchored, but (5) the Fed takes its foot off the brake, and (6) inflation takes off, or (7) you get a panic fiscal stimulus, and (8) that leads to a massive distortion in demand because policy makers hadn’t let demand destruction feed through,” explained Alpha. “In the latter part of that cycle, inflation gets de-anchored. Gold can perform in that second leg. But you don’t want to be long gold in the first leg, that’s a tighter financial conditions leg, a deleveraging leg – that’s when gold prices actually go lower.”

Alpha VI: “Inflation was non-linear in terms of the risks coming into this year,” said Alpha. “Now, with Iran, we’ll see what that really leads to.” The more inflation becomes embedded in expectations, the more interesting this can become. “Will it meaningfully impact consumer and corporate behavior? How different is the psychology when inflation rises from 3% to 4% or 5% relative to how it was when inflation bounced between 1% and 2%?” he asked. “Will this next leg in the broader inflation cycle that started in 2000 create major supply/demand distortions?”

Alpha VII: “Even if Iran gets solved this week and oil immediately drops $20, CPI inflation is going to be coming in materially higher for the next 3-6 months,” said Alpha, doubtful of a quick peace in Iran. “That means the Fed narrative changes by Q3 and they’ll be considering rate hikes. In that benign scenario, we probably see peak risk asset prices in Sept-Oct.” With positive assumptions about $1trln in ongoing AI capex spend. “And at that point, the prospect of the 2027 fiscal cliff will hit. Growth could be atrocious. The repricing across markets would be massive.”

Anecdote: “The distribution of power is crumbling,” said Sparks. investor, entrepreneur, iconoclast. “Nothing is defensible. The Houthi thing was a warning,” he continued. “Our latest technologies empower individuals and small bands of marauders. A few AI programmers create something overnight that eviscerates a business that took 40yrs to build.” People see it clearly in software, but they don’t see it in everything. “You used to need a million-man army to win a war.” Not anymore. “You used to need 20k programmers to dominate a market.” Now it takes seven brilliant programmers and Claude. “This shift is so profound, the consequences are extreme. People don’t yet realize what that means for the world, far beyond tech,” said Sparks. “Even the physical world is becoming easier to disrupt. To lift 3mm barrels a day from the ground requires an army like Exxon, but what good is all that oil if you can’t move it.” Hormuz. Suez. “In a decade we’ll look back and connect the Ukraine and Iran wars. This is the most important conflict in 5,000 years. How war is being waged is evolving at an utterly unprecedented pace, creating all sorts of non-linear potentialities,” said Sparks. “The utilization of laptops, AI, and drones has created a true dystopia.” We ran this theater for years in Ukraine. “The Iranians come along and get attacked by the Americans, and their view is that if you’re going to take us down, we’re going to take you down – they have a fatalistic culture.” Suicide bombers, literally. “In Ukraine they take out $5mm tanks with $3k drones. It’s the parable of the Hormuz Strait. And how many drones do you now need to close a global chokepoint?” Not many. “You just need to cause chaos. This is the form of nihilism I fear most. The small will become disproportionately more powerful over the coming decade.” Those with the least to lose will emerge as the most dangerous. “And the drones will play a central part. They will become cyber viruses manifested in the physical world.”

Good luck out there,

Eric Peters

Chief Investment Officer

One River Asset Management

Week-in-Review: Mon: Mexico retail sales 5.0% (3.4%e). Eurozone cons conf -16.3 (-14.2e). Japan CPI 1.3% (1.5%e). Singapore CPI 1.2% as exp. Trump said the US would postpone strikes against Iran’s energy infrastructure after “productive conversations” with the country. Sunday Inc raised $165m on $1.15b valuation to build a robot capable of laundry and dishwashing. S&P +1.2%. Tue: Mexico bi-weekly CPI 0.62% (0.40%e). Chile overnight rate target unch 4.50% as exp. Hungary CB rate decision unch 6.25% as exp. Australia CPI 3.7% (3.8%e). US to deploy additional troops to Middle East. US sent Iran a 15-point plan to end the war, despite Iran and Israel showing no signs of letup in the conflict, with Tehran signaling little willingness to compromise. S&P -0.4%. Wed: UK CPI 3.0% as exp, Core 3.2% (3.1%e). US import price index MoM 1.3% (0.6%e). US insists peace talks with Iran are ongoing, despite Tehran seeking guarantees that US and Israel won’t resume attacks, reparations for war damages, and recognition of its authority over the Strait of Hormuz. Meta, Google found liable in first social media addiction trial, a landmark decision that could signal risks for thousands of similar claims. S&P +0.5%. Thu: US init jobless claims 210k as exp, cont claims 1819k (1849k e). Mexico overnight rate 6.75% (7.00%e). Eurozone M3 money supply 3.0% (3.2%e). Trump extended his pledge to refrain from attacks on Iranian energy sites by 10 days, saying talks with the country were going “very well.” Apple to open Siri to integration with rival AI assistants in strategy shift. S&P -1.7%. Fri: US UMich sent 53.3 (54.0e). Israel struck Iran’s nuclear facilities. Iran struck a base in Saudi Arabia, wounding US troops. Iran accepted request from the UN to allow humanitarian aid and agricultural shipments through the Strait of Hormuz. Trump orders TSA Agents to be paid as partial government shutdown continues. S&P -1.7%. Sat: Israel attacks Iran nuclear sites and aluminum refiner. Iran attacks on US base in Saudi injures 12 US soldiers. Houthis fire 2 missiles at Israel and formally enter the war.

Weekly Close: S&P 500 -2.1% and VIX +4.27 at +31.05. Nikkei (flat), Shanghai -1.1%, Euro Stoxx +0.4%, Bovespa +3.0%, MSCI World -0.1%, MSCI Emerging -1.0%, Bitcoin -5.8%, and Ethereum -6.5%. USD rose +2.2% vs Australia, +1.4% vs Sweden, +1.2% vs Canada, +1.2% vs Mexico, +1.2% vs India, +0.7% vs Yen, +0.6% vs Sterling, +0.5% vs Euro, +0.5% vs South Africa, +0.3% vs Turkey, and +0.1% vs China. USD fell -2.1% vs Russia, -1.5% vs Brazil, -1.1% vs Chile, and -0.1% vs Indonesia. Gold -1.9%, Silver +0.2%, Oil (WTI) +1.4%, Oil (Brent) +2.0%, NatGas (US) -1.3%, NatGas (EU) -8.6%, Power (EU) -1.9%, Copper +2.2%, Iron Ore -2.0%, Corn -0.8%. 10yr Inflation Breakevens (EU -3bps at 2.25%, US -7bps at 2.32%, JP -1bp at 1.85%, and UK -2bps at 3.50%). 2yr Notes +1bp at 3.91% and 10yr Notes +5bps at 4.43%.

YTD Equity Index Returns: Norway +25.5% priced in US dollars (+21.4% priced in krone), Korea +22.9% priced in US dollars (+29.1% in won), Brazil +17.8% in dollars (+12.7% in reais), Taiwan +12.4% (+14.3%), Israel +11.3% (+9.8%), Colombia +10.3% (+7%), Thailand +9.6% (+14.9%), Turkey +8.9% (+12.8%), Portugal +6.2% (+8.2%), Hungary +6.2% (+9.6%), Saudi Arabia +5.7% (+5.7%), Singapore +5.3% (+5.4%), Japan +3.4% (+6%), Mexico +3.3% (+3.7%), Malaysia +3.1% (+1.9%), Australia +0.6% (-2.3%), China -0.3% (-1.4%), Canada -0.4% (+0.8%), Netherlands -1% (+0.9%), UK -1% (+0.4%), Russell 2000 -1.3%, Poland -1.5% (+2.1%), Finland -2.2% (-0.1%), Chile -3.1% (-0.6%), Austria -3.1% (-1%), HK -3.3% (-2.6%), Sweden -3.6% (-0.7%), Belgium -3.7% (-1.8%), Argentina -3.9% (-8.4%), UAE -4% (-4%), Philippines -4.1% (-1.3%), MSCI World -4.3% in dollars, New Zealand -4.8% (-4.5%), Spain -4.8% (-2.9%), Italy -5.5% (-3.5%), Switzerland -6% (-5.3%), Greece -6.4% (-4.5%), Vietnam -6.4% (-6.3%), Euro Stoxx 50 -6.7% (-4.9%), S&P 500 -7%, South Africa -7.1% (-3.7%), France -7.3% (-5.5%), NASDAQ -9.9%, Ireland -10.3% (-8.6%), Czech Republic -10.6% (-7.6%), Germany -10.8% (-8.9%), India -17.1% (-12.7%), Denmark -17.5% (-15.7%), Indonesia -19.1% (-17.9%).

Disclaimer: All characters and events contained herein are entirely fictional. Even those things that appear based on real people and actual events are products of the author’s imagination. Any similarity is merely coincidental. The numbers are unreliable. The statistics too. Consequently, this message does not contain any investment recommendation, advice, or solicitation of any sort for any product, fund or service. The views expressed are strictly those of the author, even if often times they are not actually views held by the author, or directly contradict those views genuinely held by the author. And the views may certainly differ from those of any firm or person that the author may advise, converse with, or otherwise be associated with. Lastly, any inappropriate language, innuendo or dark humor contained herein is not specifically intended to offend the reader. And besides, nothing could possibly be more offensive than the real-life actions of the inept policy makers, corrupt elected leaders and short, paranoid dictators who infest our little planet. Yet we suffer their indignities every day. Oh yeah, past performance is not indicative of future returns.