It’s a fun fact that light takes about 8 minutes to get from the sun to the earth. This creates a lag - the sun you are seeing is actually the sun as it was 8 minutes ago. Which means if the sun catastrophically exploded, everything would seem normal, with us blissfully unaware as reality hurdled towards the planet. Probabilistically, I’d be drinking a Diet Coke with my fate sealed.

This “lag” dynamic happens all the time in markets - an event happens, but then it takes time for the event to actually change outcomes in the real world. And most of the time, most markets are pretty efficient at sniffing it out. Central bank policy is famous for this. At the moment the Fed lowers interest rates, nothing changes in the economy, but the market reacts and prices in the things that will eventually be changed by a lower interest rate. You also see it when there are public market proxies for private market investments - public markets will mark down a troubled REIT or private credit fund, even if the sponsor hasn’t yet marked down the underlying private assets.

Which is why we find what is happening in markets today so bizarre. Instead of light coming from the sun, we have oil (and fertilizer and helium and LNG) coming from the Middle East. And instead of 670 million mph, those huge oil tankers travel around 15 mph, or about the same speed as a very fit person can travel on foot. A catastrophe is slowly moving through the system, as tankers finally reach their destinations…but without another tanker behind them.

The chart below from JPM shows the picture. Lack of incoming supply is being replaced by drawing down inventories, and global oil inventories have rolled over and are falling off of a cliff.

“But wait Josh, we still have roughly 8 billion barrels? That doesn’t seem so bad” is a thing you could be forgiven for asking. The problem is that you don’t get to draw all 8 billion, or even anything close to that. You need some minimum amount of oil to keep tanks, pipelines, etc functional. It’s impossible to know precisely what that number is, but the most credible sources peg the amount of oil that remains actually available at meaningfully less than 1 billion barrels. We are not far away from needing to defend tank bottoms through soaring prices.

Iran seems to believe that if they block the Strait, eventually the pain for the rest of the world will be too great and the US will cry uncle. The US seems to believe the opposite, that it is Iran that will cry uncle first. This has spawned one of the dumbest and most destructive games of chicken in human history. A lot of humans, particularly in the poorest parts of the world, have already experienced the equivalent of the sun exploding. The more this thing drags, the more the blast radius will spread. We see incredible value in betting that even the damage already done implies a resolution will not be as smooth as markets are discounting - with more damage still likely to be done.