The “Iran Deal” Deception

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For what seems like the hundredth time, a deal with Iran is apparently just around the corner.

On Thursday, Axios, a news outlet with close ties to the Trump administration, reported the following:

U.S. and Iranian negotiators have reached an agreement on a 60-day memorandum of understanding to extend the ceasefire and launch negotiations on Iran’s nuclear program, but President Trump has yet to give his final approval, two U.S. officials and a regional source involved in the mediation efforts tell Axios. Iran has also not confirmed its acceptance.

Pay attention to the wording of this article. It states the deal is “mostly agreed to… but both sides still needed approval from senior leadership”.

Hmm, that doesn’t sound like much of a deal.

Regardless, stocks rallied and oil fell.

Reality Distortion Field

At a conference in New York yesterday, Exxon Senior VP Neil Chapman was blunt in his assessment of oil markets.

“Commercial inventories of crude oil, of liquids, think petroleum, gasoline, diesel, jet fuel, they’ve all run down… We’re approaching unheard of inventory levels. I mean really, really low levels. You can debate whether that’s going to hit those really low levels in two weeks or three weeks.

Once you get to that point, then you’ll see the price shoot up.”

Chapman went on to say that Exxon has modeled the effect such low inventories would have on price. His conclusion: $150 to $160 oil is entirely possible in the near future.

Despite this, WTI crude oil is currently trading at around $87 a barrel. There’s a serious disconnect here.

Despite market action, I believe there’s a very good chance oil could remain higher for much longer than most analysts expect.

Talking Oil Down

Whenever oil spikes, a news story hits the wire about a peace deal just around the corner. Oil crashes, stocks rally. Rinse, repeat.

We’ve seen this playbook run at least 6 times now. And it continues to work.

The question is: how many more times can this ruse be effective?

Violent Repricing

By this point I sound like a broken record on this topic. But unless the Strait of Hormuz opens up soon, we are going to see oil and inflation take off like a banshee.

Inflation is already jumping. Wholesale inflation (PPI) jumped 6% in April. And take a look at Personal Consumption Expenditures inflation (blue) and core PCE, which excludes food and energy (red):

The good news is that we’re not nearly at 2022 levels. But we could well be on the way there. And it’s important to keep in mind that these are official government statistics, which notoriously understate true price hikes.

There is a very good chance that the oil crisis isn’t over yet. If it worsens, inflation will get completely out of control.

Deteriorating Economy

Meanwhile real wages dropped in April, while spending rose. That means people are spending with credit cards or dipping into savings. As a result, the U.S. personal savings rate plummeted to 2.6%, levels last seen in 2008.

Source: Charlie Bilello

Americans are struggling to get by. The only things keeping our economy afloat are AI and spending by top earners.

The chart below shows the growing gap between the highest American earners and the bottom 80%. The top 10% now accounts for 48% of total spending.

Source: FT

The trend here looks downright awful.

The economy is also slowing. Q1 GDP growth came in at just 1.6%. Not long ago the estimate was for 3%. And like other government stats, this one is “massaged” too.

I fully expect the Trump administration to resort to stimulus checks, probably before the end of the year.

A Real Deal

A real lasting deal with Iran still seems months away. And we quite simply don’t have that much time. We need to reach a deal to open the Strait of Hormuz immediately. But this is Iran’s primary leverage, and they won’t give it up easily.

The damage to the world economy is piling up.

Both sides are acting like they have all the time in the world. This is intentional. As Jim Rickards says, it’s the grandest game of chicken ever played.

Neither side wants to give the impression that they need a deal to happen. But both do. It’s a heck of a pickle.

Getting a lasting deal done will require old-fashioned diplomacy and compromise. But right now everybody’s focused on saving face and making maximalist demands.

So despite the positive headlines, I’m not optimistic about a real resolution. This crisis could drag on through the rest of the year. And that would be disastrous for the world economy.

Despite this, I’m not necessarily bearish on hot stocks here. This is a certified market mania and attempting to short a market like this is hazardous. When investors want an excuse for stocks to rally, they’ll find it. However, when this market finally does break, watch out.

Here’s to hoping I’m wrong, and we get a lasting deal soon.

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