Every day the Strait of Hormuz is closed at least 10 million barrels is not being produced. (Estimates have it at as more like 14 million.) Combined with destruction of some oil facilities, and its around 1 billion barrels not produced even if everything went great starting now.
As the war started there was glut of oil. That glut is running out quickly. That means in the next month it is possible to have oil jump to $200 or $300 barrel. In other words the day of reckoning is near.
Now how big of a deal is this? For today I want to summarize an interview on ProfG Markets podcast. Professor Aswath Damodorin is a professor of Finance at NYU's Stern School of Business. The guy wins teaching awards left and right and I love reading his work and watching his interviews.
Six months ago Aswath went on the Pod and was more pessimistic than I've ever heard him. He predicted the market was going to go down. Since then the market has skyrocketed. Was he wrong? No, he made the point then and repeated it here that timing the market is a fool's game. Underlying fundamentals do matter but the market is moved by forces that don't look at the underlying market conditions.
To save you two hours of watching his interview back then and his interview yesterday I will summarize his take on where we are:
Isn't is our current situation the same as the dot com bubble in 2000?
The impact will be greater because the dot com downturn was cased by collapse of expectations… thus time it will be caused by a collapse of capex spending… therefore a greater impact on the GDP.
But it may not impact jobs as much because the AI buildup is dependent on job destruction so if the bubble pops because AI proves to be not so good at replacing workers it means the stock market drops while unemployment doesn't.
What if Taiwan is invaded?
Markets have not priced in catastrophic risk based on military fears... but that’s not as bad as not pricing it in the oil markets because that directly impacts spending.
How screwed are banks? Are we looking at a repeat the 2008 financial crisis?
Banks trying to diversify debt because of this AI spending buildup won’t be as impacted so that's good... but diversification doesn’t work if all banks are doing it…. In other words since all banks are participating there is nowhere to hide.
Example of an industry where it may be impacted?
Higher education. For higher education the impact may be on the research side because AI can do it. What excuse do you have to teach only 2-3 classes per semester and recursive the salary you are receiving?
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