Asymmetric Warfare

I wasn’t going to write about the War, but this morning Shrub Jr asked me a great question:

• “Would you rather take $50 now, or “Spin the Wheel” with a 70% chance of winning $100 and a 30% chance of getting nothing?”

I kid you not, this happened before breakfast.

The kid is really good at getting me to think. Way better than AI.

His question helped me to frame my view of the current market setup:

• “Would I rather play it safe and lock in a good start to the year? Or should I play to make a bit more but with a 30% chance of giving back a decent chunk?”

Lets add to the equation that the S&P is just 2% off its All-Time-High and the decision should be made easier!

Lets be honest. None knows how this will play out, so why bother?

I did find Goldman’s analysis the most amusing:

They expect the crude flows through the Strait of Hormuz to recover fully by mid-April…but they caveat that if they don’t, then Oil will hit $100!

That’s really helpful, thank you for the wonderful insight.

I understand that most people in the markets are now algos and institutions, and it’s not their money so they don’t care about losing it…

…but in my case it’s my money and I trade for a living. Therefore, I can only afford to consider Shrub Jr’s bet from the perspective of “Preservation of Capital”…

…whereas an algo would always take the “Spin the Wheel” option because the “expected value” of “spinning the wheel” is higher than just taking the money that’s on the table (70% x $100 + 30% x $0 > $50).

In case you were wondering why the Market was up on Monday after the Iran War started, think of it like it was all the algos buying because they assume a 70% probability that “Nothing ever Happens” … because they don’t care if “Something Happens”!!!

But if “something happens” and you are caught in it … it’s your problem to deal with.

Crude Analysis

Our scenario analysis on Crude has been summarized by the ShrubGPT-generated map below:

• The equivalent of c.20% of global Oil consumption passes from the Strait of Hormuz.

• Any proper disruption and Oil jumps to $80-100. Brent is already at $85.

• It’s worth noting that Asia is disproportionately impacted, since 40-50% of their crude demand passes through the Hormuz Strait.

• Also, 1/3 of the world’s globally traded urea passes through the Strait. A shortage in fertilizers may cause a spike in food prices, and high food prices are a major cause for revolutions and wars…

But enough of that.

I think it’s time to make an adjustment to our map:

• Khamenei, aka Jabba the Hut, has been eliminated.

• However, as we often found in history (as well the “Mandalorian” series!), when a Boss-level villain gets eliminated, soon thereafter various factions appear and vie for control.

• In this case, just as we had the Houthis in the Red Sea (portrayed by the Tusken Raiders below), we will soon have a lot of Houthi-types around the Hormuz Strait, creating disruptions. They don’t need much: a few drones and explosives will do.

Good luck negotiating with all the different factions. But I’m sure Goldman spoke to all of them and they guaranteed that the Hormuz Strait will be all-clear by mid-April!

Going back to Iran, it’s not like there’s anyone left there to call for negotiations either. Even if Trump wants to TACO, he might not find any takers!

Again. Maybe it all gets resolved soon and we’ll go back to our regular schedule of debasing our currencies and sending risk assets to the moon.

But it’s a silly bet to bet the house on. Once again, we are 2% off the All-Time-Highs.

I’ll be staying cashed up and defensive thank you very much.

If I’m wrong, you can make fun of me for missing out on a 2% rally to a new all-time-high. Congrats in advance. Shrub Jr would argue that it was a stupid bet to take in the first place.

Good luck out there!

🌳🙏

Disclaimer:

This isn’t financial advice. This is Parody. This is the equivalent of Monty Python for finance, but worse: This is the trading blog of a shrub. For all you know, I could be a 15-year old paper-trading out of my parents’ basement. Don’t be Stupid. Seriously. How many times do I have to repeat this …