Founder, Social Innovation Circle | LC Philanthropy | Adjunct Professor of Finance, Hong Kong University | impact investor supporting social entrepreneurs
Hong Kong
Joined February 2010
- Tweets4.7K
- Following2.1K
- Followers2.2K
- Likes5.9K
The market knows that the Fed won’t dare raise rates again just before the midterms so it’s doing the job for it
The first way that most people encounter another culture is through food.
Restaurants are the most important embassies in the world.
Mark Cheng retweeted
U.S. Diesel Export Ban
The elimination of 1.67 million barrels per day of diesel exports will create a short-term domestic surplus which will have to then be sold at a discount thus providing short-term pricing relief for U.S. households and talking points for policy actors to claim that they are addressing a growing affordability crisis.
However, once one examines such a policy approach the ill-logic of a diesel export ban is all too easy to spot: a temporary increase in supply following such an export ban will quickly turn into a supply shortage and rising prices.
Because the U.S. exports it surplus production-total production is roughly 5.3 million barrels per day which is above the approximately 3.6 million barrels per day of domestic demand-once that inventory is absorbed by the domestic energy firms would then pull back on production until it reaches the new and lower equilibrium level which of course would result in lost revenues and a probable increase in industry unemployment on the back of that intervention into the marketplace.
An export ban intending to increase supply results in a shortage of not just diesel but also likely gasoline as the crude that was previously dedicated to the production of diesel then needs to be sold resulting in increased exports of raw crude at higher prices.
As a result a bifurcated price structure domestically that would ensue-there are multiple markets within the U.S. with the Gulf Coast seeing a lower price versus higher prices on the West Coast and prices remaining closer to the internationally set price on the East Coast-creating further uncertainty across the economy.
Even with the logistics constraint-the Jones Act-which required all goods transported by water between U.S. ports to be on American owned and staffed ships-being temporarily lifted this will not eliminate the bifurcated price structure that would ensure in the aftermath of such an energy export ban.
Increasing complexity within an antiquated energy infrastructure is in no one’s economic or policy interest.
Second, such a ban would result in the elimination of that 1.67 million in U.S. diesel exports reducing the total global supply by just over 18%.
That will send global prices higher creating conditions in which those costs will be passed along to the production of other goods which the U.S. imports.
Given global supply and inflation dynamics this would result in a negative feedback loop that would result in an already deteriorating international pricing environment that would likely cause global central banks to send policy rates higher than they already are prepared to do.
We’re at an incredibly dangerous moment.
Trump is staring down the barrel of a midterms wipeout, potentially losing both the House and Senate - a possibility that was considered remote a year ago.
The blame falls squarely on him: Iran war oil shock, trade war with Canada, interest rate rises, diesel price shock. All attributable to actions taken by this administration in the past few months.
The temptation for a desperate last minute Hail Mary pass must be huge, whether that’s a final shock-and-awe attack on Iran (perhaps with nuclear weapons?), some other madcap foreign adventure, or even a false flag operation to use as a pretext to call off the midterms or challenge the results.
I think any of those are an open possibility at this point.
Unfortunately true: this war has no off-ramp
THERE IS NO DIPLOMACY: PARSI SAYS THE WAR HAS NO OFF-RAMP
Trita Parsi, executive vice president of the Quincy Institute, just returned from the region after speaking with analysts and government officials across the relevant countries. He says he found no data point suggesting this conflict is turning toward a deal. Seven months after Washington expected a four-day fight, he argues there is still no diplomacy to end it — and no opening for one.
THE EMPTY TABLE
➡️ “There is no diplomacy to end it either, incidentally, which is very important to understand.”
➡️ Parsi says de-escalation is now the hardest scenario to connect, because the talks themselves are missing.
➡️ He heard a tremendous expression of concern. Almost no one wants what is coming. The train, in his words, is still heading that way.
➡️ Iran is frustrated that the Trump administration will not come to the table. Short of complete surrender, he says, Tehran cannot even see what Washington wants.
THE STRAIT IS A “NON-ISSUE”
➡️ Parsi says the administration will not discuss the Strait because it treats the Strait as a non-issue.
➡️ The blockade is being used to extract nuclear concessions from Iran, not to reopen a corridor.
➡️ Officials talk about opening only 30 to 40 percent of the traffic — oil volume, not LNG or other products — and holding that squeeze through the midterms.
➡️ Regional states tell him that share is not enough, and they do not believe it is stable. If it starts working, they expect Iran to counter-escalate.
WHY THE GULF IS FURIOUS
➡️ Twice in a single day, Parsi says, Mohammed bin Salman called Trump asking for help against Ansar Allah and did not get it.
➡️ Gulf officials hear supreme American confidence in a strategy nobody can explain, and they remember 2019 and 2021 the same way: Washington did not come.
➡️ Their primary security concerns, he argues, are simply not on the U.S. list.
NOTHING UNTIL A THIRD ROUND
➡️ Political will for a new regional architecture has collapsed.
➡️ “The expectation is that nothing is going to happen diplomatically until a third round has occurred.”
➡️ Escalatory options now go beyond infrastructure strikes. Parsi says Iraqi militias taking Kuwait is being seriously discussed in a larger blow-up — talk that was not even on the table weeks ago.
➡️ JPMorgan, he notes, has already admitted it does not know how to model the endgame. Red lines Washington was assumed to avoid have been crossed.
THE ONLY ACTOR WITH LEVERAGE ON BOTH SIDES
➡️ Parsi still sees no U.S. request for a mediator.
➡️ China, he argues, is the only country with real leverage over both Washington and Tehran.
➡️ Beijing’s instinct is to stay out. The cost of staying out, he says, is starting to look higher than the cost of stepping in — if Gulf states and Iran ask separately.
➡️ That is not diplomacy happening now. It is a last card if the next round wrecks the oil system.
THE BOTTOM LINE
Parsi’s regional read is blunt: the war is seven months old, the off-ramp is empty, and Washington is using the blockade instead of a table. Until someone opens that door, the only path he can see is more escalation first.
#TritaParsi #NoDiplomacy #IranWar #Hormuz #ThirdRound #GulfCrisis #ChinaMediator
HT: YouTube Mario Nawfal @tparsi
Mark Cheng retweeted
BREAKING: World oil inventories are projected to hit their operational floor of 6.8 billion barrels this month if the Strait of Hormuz stays shut, per JPMorgan.
Below this level, pipelines can't maintain pressure and refineries start failing, regardless of what price oil is trading at.
This would mark the first time in recorded history the world has had to worry about physical oil availability, not just price.
Apparently the US was all set to launch a major attack on the Houthis this weekend.
Trump called it off.
MBS not going to be happy.
BREAKING: Trump has called off US airstrikes on Yemen's Houthis, reversing himself in a last minute decision after already deciding to carry them out on Sunday, with commanders having approved target lists and troops loading bombs onto US warplanes as the large-scale operation was just about to begin, per NYT.
Trump told advisers on Wednesday he did not favor strikes, ordered the Pentagon to prepare them after MBS urgently called him again on Thursday, then pulled back on Sunday, with most of his inner circle opposed to opening another front given the strain the Iran war has put on the US military. It is the third time MBS has asked Trump to strike the Houthis this month.
Just two days ago Yemen's Houthis struck Riyadh's main airport, they now hold Bab el-Mandeb and Yemen's entire Red Sea coast, and the East-West oil pipeline, Saudi Arabia's only export route around Hormuz, is shut after being hit.
The US has already used more than half its most advanced Patriot interceptors and a third of its Tomahawks in the Iran war. A campaign in Yemen would draw on the same stocks while inviting retaliation on the Saudi energy infrastructure the Houthis are already hitting, and from Iran, which has threatened every US interest in the region. Saudi Arabia is facing the Houthis without the US.
The Saudis are in real trouble.
Not only have the Iranians cut off the straits of Hormuz, but now their allies the Houthis have seized the town of Mocha with barely a fight and are closing in on the strategic port of Bab-el-Mandeb on the Red Sea.
If they take that, which is likely if the US don’t intervene, then the Saudis would have lost their Red Sea tanker export route as well, leaving them with only one option left - direct pipeline to Yanbu. And you can bet that that will come under fire as well.
MBS has been placing frantic calls to Trump in the past few days begging for air support, which Trump has flat out refused.
The US have their hands tied up with the Iranians, and have no capacity to shift resources from the Gulf to the Red Sea.
The Saudis must be hopping mad. Trump launched a war which they did not want, and now the entire Gulf economy may very well crash as Iran and it’s allies slowly shut down all export routes, with 20% of the world oil production going off-line indefinitely.
This was the scenario which was completely unthinkable six months ago.
Kuwait has already effectively been entirely off-line for months.
Could the same thing happen to Saudi?
You have to wonder what this is going to do to GCC – US relations. Will the Saudis still be as keen to invest the US 1 trillion as promised?
Publicly they’re committed, but behind the scenes they must be spitting blood.
Mark Cheng retweeted
While everyone is watching crude oil futures, the physical crude oil market is out of control.
Shipping costs for crude oil are surging at a near-unprecedented rate.
The cost to ship 2 million barrels of crude oil from West Africa to China is now up to $23.59/barrel.
To put this into perspective, in July, the cost for the same shipment ~$6.50/barrel.
That's a +258% surge in shipping costs in just 2 months.
We are witnessing one of the largest global energy shocks ever recorded.
All asset bubbles, whether in real estate, crypto, tech stocks, or even tulips, work in a similar way.
An asset, based on a great story, starts to get attractive.
Early investors make a killing and word spreads.
Other people begin to pile in and the price keeps moving.
Then people begin to borrow against those inflated prices in order to buy more.
The price starts to rocket, not because the fundamentals justify it but because of sheer momentum stoked with leverage.
(The smart early investors quietly exit at this point, while egging the crowd on).
The new investors get in at inflated prices and borrow to do so. Now it’s just the FOMO crowd that’s piling in and keeping the show on the road.
At this stage the price is going up simply because the price has been going up.
Fundamentals got left behind a long time ago (“this time is different”).
What breaks the bubble is something that stalls the explosive price growth.
Maybe defaults on homeowner loans start to rise. Maybe a frontier lab keeps bleeding cash or fails to IPO.
The story starts to shake.
At first, the crowd doesn’t stop. Every wobble is seen as an opportunity to “buy the dip”.
But then, disquiet spreads. It doesn’t even have to be a drop, simply a flattening of the growth curve is sufficient because people are overleveraged.
The over excited day trader who borrowed too much gets caught on a margin call & is forced to liquidate.
Selling begins slowly, and then suddenly. Asset prices then drop 20-30%, and more margin calls occur, resulting enforced liquidation.
The leveraging cycle then takes place in the other direction. Crash.
The irony is that long-term, the hype was justified. The Internet really did change the world. So will AI.
But in the short term, the market will always get ahead of itself, pull back and then eventually rebuild.
But a lot of companies, and individuals, will get left behind in the wreckage.
US margin debt is soaring to record levels - exactly what you would expect in the late stages of a bubble
BREAKING: US margin debt surged +$37 billion in August, to $1.45 trillion, its 2nd-highest on record.
Margin debt has risen +$228 billion year-to-date, or +19%.
Since the end of 2022, investor borrowing has soared a massive +$847 billion, or +140%.
This has significantly outpaced the S&P 500's gain of +98% over the same period.
At the same time, margin debt as a % of GDP has almost doubled, to a record 4.5%.
By comparison, the 2021 and 2000 Dot-Com Bubble highs were 3.6% and 2.8%, respectively.
Investor leverage is through the roof.
Mark Cheng retweeted
Henry Kissinger famously said “to be an enemy of the United States is dangerous. To be its friend is fatal”.
Looks like it’s now the Saudis turn to learn this lesson.
Remember when Liz Truss was UK PM for just 49 days?
She was ousted because her
mini-budget’s unfunded tax cuts sent the 10 year gilt yield soaring to over 4.5%, and the 30-year to 5.1%.
Today the 10-year sits at 5.35% and the 30-year at 5.91%.
Higher than during that crisis.
Under Truss, the market collapsed in four days. This time round, it’s ground up slowly over several months.
But whether fast or slow, the frog still gets boiled
The Saudis are in real trouble.
Not only have the Iranians cut off the straits of Hormuz, but now their allies the Houthis have seized the town of Mocha with barely a fight and are closing in on the strategic port of Bab-el-Mandeb on the Red Sea.
If they take that, which is likely if the US don’t intervene, then the Saudis would have lost their Red Sea tanker export route as well, leaving them with only one option left - direct pipeline to Yanbu. And you can bet that that will come under fire as well.
MBS has been placing frantic calls to Trump in the past few days begging for air support, which Trump has flat out refused.
The US have their hands tied up with the Iranians, and have no capacity to shift resources from the Gulf to the Red Sea.
The Saudis must be hopping mad. Trump launched a war which they did not want, and now the entire Gulf economy may very well crash as Iran and it’s allies slowly shut down all export routes, with 20% of the world oil production going off-line indefinitely.
This was the scenario which was completely unthinkable six months ago.
Kuwait has already effectively been entirely off-line for months.
Could the same thing happen to Saudi?
You have to wonder what this is going to do to GCC – US relations. Will the Saudis still be as keen to invest the US 1 trillion as promised?
Publicly they’re committed, but behind the scenes they must be spitting blood.
Details on that pipeline strike.
Bottom line: the pipeline was Saudi’s back door way of getting oil out without going via Hormuz.
With the pipeline down, that route has been shut off. That means 7mn fewer barrels per day getting out.
This means an even bigger oil shock coming
For macroeconomists, the last few months has been like watching a slow motion car crash.
The yield on 10 year UST is about to cross 5%. This is a level that, with the national debt now over $40 trillion, is considered unsustainable long term.
Investors worldwide know this which is why they’re pulling back. You’re seeing this with everything from the rise in gold to the way trade contracts are quietly being renegotiated into other currencies.
