Markets Flash Back to the Past || Peter Zeihan

0:00 Hey, all.

0:00 Peter Zeihan here, coming to you from Colorado.

0:03 Today, we're going to do something a little different and talk about markets.

0:07 Don't worry, there's no trading advice in this.

0:09 I don't do that.

0:11 [sighs]

0:11 Uh but, markets have been very, very strange since the Iran war has started.

0:15 They've been gyrating, but really have not shown any understanding

0:22 of the threat that we have been facing.

0:24 We have roughly 1/4 of all uh internationally traded oil that floats

0:31 on the water that has not simply been disrupted, but is gone.

0:35 Um Even if the war were to end this second,

0:38 most of that's not going to come back on before the end of the year.

0:42 Some of it will be gone for a couple of years.

0:44 Um that's before you consider natural gas or alumina or aluminum or fertilizer

0:52 uh or the various products that come

0:53 out of gutters natural gas processing facilities.

0:56 These things These things are gone.

0:58 Uh we now have a weapon system in place that has a reliable range of 600 mi,

1:03 which is triple what they need in order

1:05 to disrupt things on the other side of the Gulf.

1:07 They are difficult to jam.

1:09 They are difficult to intercept.

1:10 And with the technologies in place and in existence at the time,

1:13 it can't be done at cost uh at any sort of reasonable cost.

1:17 Um The markets are pretending to themselves that uh we are simply

1:22 hours away from peace and going back to things as they were before.

1:27 And with every Trump troop social post, we get gyrations up.

1:32 And then, something like, say,

1:33 the United States hijacking a supertanker comes along,

1:36 and we barely get a response.

1:38 Um this degree of retardation in the markets uh makes very little sense to me.

1:46 And then, I thought about it a little bit more,

1:48 and it's because the markets being presented

1:49 with something they've never been presented with before.

1:52 You see, since 1945, we've had a globalized system where the United

1:55 States upholds what makes it all work.

1:58 And I remember that whenever I walk into a room full of finance

2:01 people explaining that the world after

2:04 1945 is based on American security guarantee,

2:06 this is something that surprises them.

2:09 Uh in the United States, the idea that economics for the US is a subset

2:15 of security is something that really never gets processed.

2:20 And the financial crowd is arguably either the top

2:23 or the second most globalized of America's industries.

2:28 So, for them, the idea that the entire underpinning of their sector is now

2:34 gone uh is something that really takes a while to get their mind around.

2:38 And so, the money keeps flowing.

2:39 So, stock markets are stable to up.

2:42 Oil prices, despite the gyrations, have been trading within a reasonable band.

2:46 And we haven't seen anything like the disruptions in oil markets like

2:50 that we saw back in 2007 at the dawn of that financial crisis.

2:55 And those disruptions were largely nonexistent.

2:58 The ones now are permanent.

3:00 So, what is going on here for real?

3:03 And what should we expect?

3:06 Well, let me give you a few items just

3:08 kind of file away in the back of your head.

3:11 Uh number one, we are seeing reduced refinery

3:15 runs across Europe and across East and Southern Asia.

3:21 This is not demand destruction.

3:23 Demand destruction is when prices reach a certain point that people change

3:27 their economic activity because they can't

3:30 afford the energy or the what product, whatever it happens to be.

3:33 That's not what we're seeing.

3:34 We're nowhere near those 2007 highs that triggered real demand destruction.

3:38 That's before you consider uh inflation index terms.

3:41 We're barely half of that level.

3:44 No, the refineries aren't slowing down operations because there's no demand.

3:49 They're slowing down operations because there's no feedstock.

3:53 We've had such a deep and ongoing disruption to energy outflows from the Gulf

3:58 that over half a trillion barrels of crude now have not been produced,

4:03 have not been shipped to port, have not been loaded on tankers,

4:06 have not sailed out of the Strait of Hormuz,

4:08 have not gone to their end destinations.

4:11 Which means that if we're seeing refinery runs reduced,

4:16 it's not just that there's not enough crude making it out of the Gulf,

4:21 it's that the crude oil reserves of the various companies and countries

4:26 are being depleted to the point that it's affecting refinery operations.

4:32 We're also seeing already reductions in things in shipping,

4:37 most notably diesel in the case of trucks in places like Australia,

4:40 China, or Europe, and jet fuel pretty

4:43 much everywhere except for the United States.

4:46 That means that these shortages aren't just a throughput issue.

4:50 They're not just a reserve issue,

4:51 it's a commercial inventory of refined product issue.

4:54 And that sort of breakdown is something we have

4:56 never seen in the post-World War II environment, not once.

5:01 And markets don't know how to price that because how do you

5:05 price a barrel of crude that is never produced in the first place?

5:09 What modern markets do is they look for price signals.

5:12 Slight changes in supply or demand

5:15 from this market or that market or that subsector, whatever it happens to be,

5:19 and then the price of crude adjust around

5:20 that, and that provides forward price signaling for things like producers.

5:25 We are not seeing that because that is not happening.

5:28 We have seen a gross dislocation of the structure of production and transport,

5:35 and they don't know how to price that.

5:37 Under normal circumstances, higher prices would stimulate more production,

5:42 but most oil fields take somewhere between 4 and 11 years to come online.

5:47 In the United States that has shrunk down because of the shale

5:49 revolution to weeks to months but that just is at the wellhead.

5:56 If you want to export crude to a world that can't get enough of it,

6:00 well, then you need export infrastructure.

6:02 And you don't do that in a day or in a month or in a year.

6:07 Which means at some point in this year,

6:10 we have a fundamental break between the reality of what's going

6:15 on in the ground with energy

6:17 and this facsimile that exists in the financial markets.

6:22 What will look on the other side of that break?

6:24 Don't know, but two things.

6:25 Number one, it's coming soon cuz we're reaching the point

6:28 there just isn't enough product to carry out normal activity.

6:31 And number two, I can guarantee you it's going to involve rationing.

6:35 And rationing is not something the market does well.

6:38 That's something that requires government intervention.

6:41 And when that happens, the question is what are markets?

6:45 What is their purpose then?

6:47 It's supposed to be about the efficient allocation of capital.

6:50 But that's not the world we're about to be in.

6:53 We're going to be in a world of absolute energy scarcity

6:57 and the financial markets arguably not going to be a player in that.

7:02 Now, whether that's a buy or a sell trade, I will leave up to you.

7:06 I don't think it really matters at this point.

7:09 One of the things that most people forget is over the long

7:12 run of global history in the period before World War II,

7:17 it was the nature of almost every market in existence to ultimately

7:21 go to zero as the foundations that allowed it to exist broke.

7:25 Well, [sighs and gasps] get ready to return to the past later this year.