Things are amazingly more bad than markets seem to think

For no reason I can understand, markets seem to think that (with the cease fire with Iran) things are going to return more or less to normal, more or less immediately. This is false. It is not just false, it is so far from the truth that I don’t understand why way more people aren’t panicking.

There are so many problems with oil supply delivery right now—so many more than just the Strait of Hormuz. A lot of oil and gas production infrastructure is gone. A lot of oil and gas distribution infrastructure is gone. Even where the production infrastructure is still there, since there’s no way to ship out what is produced, production is being shut in. Production that has been shut in will take weeks to get started again. And it won’t be started again until it can be delivered.

At the same time, shipments of oil and gas that came out through the Strait just before it was closed, are probably only now reaching their destinations—meaning that it is only now that refineries are finding themselves without their next input for refining. The refining facilities are going to have to shut down. And just like the production facilities, it will take weeks to get them started again. And they won’t be started again until the people who run them foresee reliable, steady deliveries of crude.

These effects are already obvious in the observed spread between spot prices (the cost of a barrel of crude to be delivered right now), which are high (although not as high as I think would make sense), and futures prices (the cost of a barrel of crude to be delivered in a month), which are also high (but not nearly as high as I think would make sense).

The same is true (with various differences in details) with helium, nitrogen for fertilizer, aluminum, and who knows how many other commodities that used to come though the Strait.

This all matters because the knock-on effects are going to be huge. Higher fuel prices—much higher, and for much longer than the markets are currently anticipating. Higher food prices, due to the shortage of fertilizer reducing food production, especially of corn—which is a major input to both meat production and to ethanol production, meaning another way it feeds-through the higher energy prices. Higher helium prices feed through to shortages of computer chips—which were already under strain due to AI-related data-center demand.

In the background of all these are Trump’s tariffs from a year ago, the impact of which was eased in many different ways (the pause, various rate cuts, firms stocking-up ahead of the imposition of the taxes, the supreme court decision ruling that the worst of them were illegal), all of which delayed the main impacts for months. For some reason, the markets seem to think that those impacts would quit showing up in comparison to the year-ago numbers (since the tariffs were announced one year ago), but in fact are probably only now fully showing up in reported numbers.

My take on all this is that every aspect of the economy is going start getting bad, and then going on getting worse. The getting-worse phase will go on at least for months and months, and very possibly for a year or two or three.

Inflation spiked up to 3.3% last month, but that is only the start. That’s just the energy-price spike. As soon as those effects feed through to other prices, they’ll all go up. And as soon as those high prices start forcing people to cut back on other spending, we’ll see at least a recession, and very possibly worse than that. And that’s all before actual shortages or fuel and food start impacting every aspect of people’s lives.

Oh, and as I’ve said before: Don’t imagine that having some idea about what things are going to be higher-priced or in short-supply gives you the sort of insight that will let you invest to make money off these circumstances. The real-world impact of these things are going to be chaotic enough that any particular investment could go very badly wrong, even if your understanding of the general direction of events is correct. And, of course, the government is going to trying to protect their supporters (oil companies and tech billionaires, mostly) so they may well be bailed out. Any investments that suppose that things will go badly for them in particular may well go spectacularly awry.