MacroVoices #530 Daniel Lacalle: China and The Us Will Decide The Outcome of The Iran War
Daniel Lacalle, chief economist at Tressis, analyzes the geopolitical and economic fallout from the Iran conflict and Strait of Hormuz closure, arguing that the US and China have significant staying power while Europe and emerging markets face severe stress. He contends that persistent inflation driven by money supply growth is masking underlying economic deterioration, and that oil prices have likely peaked but will remain structurally elevated due to a permanent geopolitical risk premium. The episode also features a trade-of-the-week segment positioning long US financials against short European financials to capture the expected divergence.
Summary
The episode opens with host Eric Townsend describing a scenario in which Iran peace negotiations have completely collapsed, with WTI crude oil above $110 and Brent above $120, yet the S&P 500 is rallying to new all-time highs — a paradox that frames the entire conversation with Daniel Lacalle.
Lacalle explains the market disconnect by pointing to soaring global money supply growth, which he says is the fastest since 2021, led by China but also present in the US and UK. He argues that while the Iran war is suppressing money velocity through reduced investment and consumption, the surge in money supply is inflating financial asset prices even as real economic conditions deteriorate.
On the geopolitical contest of staying power, Lacalle argues that both the US and China can endure the Strait of Hormuz closure for an extended period. The US is now a net oil exporter at 2.8 million barrels per day and is exporting record volumes of petroleum products. China has the world's largest commodity stockpiles, has banned refined product exports, and benefits from its strategic energy partnership with Russia. Iran, by contrast, derives 25% of GDP and 60% of government revenues from the Strait, making it the most economically harmed party in the standoff. Yet Lacalle notes the Iranian regime can sustain the status quo longer than Europe or many emerging markets can withstand it.
Lacalle identifies Europe as the most economically vulnerable region, noting that European consumer sentiment is at its lowest since the pandemic, jet fuel availability is critically strained, and the region failed to build energy security after the 2022 Ukraine war price spike — which it misread as a policy success rather than a warning. He says the EU's farming sector has been particularly weakened by years of overtaxation and misguided environmental regulation, making the fertilizer price shock especially damaging there.
On oil prices, Lacalle believes they have already peaked and that the futures curve's steep backwardation reflects the market pricing in normalization. However, he emphasizes that even the forward curve's implied disinflation still leaves oil prices significantly above January 2026 levels by year-end. He argues the geopolitical risk premium — which had abnormally disappeared over the prior three years — is now permanently re-priced into energy markets. He also argues that the US has shifted from being a 'shock amplifier' in past crises (like 1973 and 2008) to a 'shock absorber' as the world's largest producer and net exporter.
Lacalle explains the unusual inverse relationship between gold and oil (gold falling as oil rises) as a function of leveraged long-gold/short-dollar positions being unwound due to margin calls as the dollar strengthened. Central banks that had been accumulating gold also began selling some to defend their local currencies, capping gold's upside without causing a collapse.
On persistent inflation, Lacalle argues that governments globally are spending at record levels, increasing debt and money supply, while actively trying to prevent any decline in aggregate demand. He notes that official CPI figures understate the true erosion of purchasing power, pointing out that food and shelter — two of the largest real costs for consumers — have risen at roughly twice the cumulative rate of official CPI in Europe and the UK over the past seven years.
Lacalle also discusses sector-specific consequences of the crisis: aviation margins are deteriorating rapidly; the automotive sector faces spare parts shortages; tourism faces a difficult summer; and the financial sector in Europe risks delayed credit deterioration and margin compression that hasn't yet appeared in the data.
The conversation concludes with Lacalle suggesting that all of the current tensions — the Iran war, the trade war, energy supply chains — are likely to converge toward a Trump-Xi summit that produces a comprehensive deal, as both superpowers have mutual interest in resolution.
In the postgame segment, Eric Townsend and Patrick Ceresna discuss the trade of the week: a long US financials (XLF) versus short European financials (EUFN) pair trade to capture the expected convergence of European financial stress with market pricing. They also cover oil technicals, gold's corrective phase, uranium's quiet consolidation, and the 10-year Treasury yield's tight correlation to oil prices.
Key Insights
- Lacalle argues that soaring global money supply growth — the fastest since 2021, led by China — is inflating financial asset prices even as real economic activity deteriorates, which explains why equity markets are rallying despite a worsening geopolitical crisis.
- Lacalle contends that Iran is the most economically damaged party in the Strait of Hormuz standoff, with 25% of GDP and 60% of government revenues flowing through the Strait, yet the regime can sustain the closure longer than Europe or many emerging markets can endure it.
- Lacalle argues that the United States has structurally shifted from being a 'shock amplifier' in oil crises (as it was in 1973 and 2008 when it was a major importer) to a 'shock absorber,' given that it is now the world's largest producer and a net exporter of 2.8 million barrels per day.
- Lacalle believes oil prices have already peaked, but emphasizes that even the futures curve's implied disinflation leaves prices significantly above January 2026 levels through year-end 2027, meaning the re-priced geopolitical risk premium is likely permanent rather than temporary.
- Lacalle argues that Europe is the most vulnerable major economy because it misread the 2022 Ukraine war price spike as a policy success rather than a warning to diversify energy supply, and consequently failed to build security of supply or source flexibility.
- Lacalle explains the unusual gold-down/oil-up dynamic as a function of highly leveraged long-gold/short-dollar positions being forced into margin calls as the dollar strengthened, compounded by central banks selling gold to defend their local currencies.
- Lacalle argues that persistent inflation is structural and policy-driven, because governments are actively preventing any decline in aggregate demand through spending and debt accumulation, while official CPI metrics understate the true loss of purchasing power since food and shelter costs in Europe have risen at roughly twice the cumulative official CPI rate over seven years.
- Lacalle argues that Venezuela could relatively easily increase production from 500,000 to 1.2 million barrels per day, but returning to its historic 3.5 million barrel capacity is nearly impossible in the short term, limiting the upside offset to Iranian supply disruption.
- Lacalle suggests that all current geopolitical and economic tensions — the Iran war, the US-China trade war, and energy supply chain disruptions — are likely to converge toward a Trump-Xi summit that produces a comprehensive resolution, as both superpowers have strong mutual incentives to reach a deal.
- Eric Townsend argues that the UAE's withdrawal from the OPEC alliance signals that post-conflict, the UAE intends to produce at maximum capacity to capture the supply deficit, and that this likely marks the end of effective OPEC spare-capacity management, leaving the global oil market permanently more vulnerable to future price spikes.
- Lacalle identifies aviation and automotive sectors as particularly at risk from second-order effects of the crisis, noting that aviation margins can turn negative very rapidly and that automotive supply chains are being disrupted by stranded cargo ships carrying essential spare parts.
- Lacalle argues that the aviation, tourism, and broader services sectors in Europe are facing a difficult summer, with the services PMI already in contraction for the first time in three to four years, and that the financial sector will experience a lagged deterioration through margin compression and credit quality deterioration that has not yet appeared in market data.
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