Worst Case Scenario

The consumer is imploding due to high oil prices and the Fed can't do anything about it because of high oil prices. This isn't "stagflation" as so many bulls want to believe - this is obliteration...

Yesterday, we got the news that recession will be unavoidable if oil prices remain at these levels for even a few more weeks despite the fact that the U.S. has energy independence. Why? Because oil is a global commodity, therefore a supply shortfall in the rest of the world translates into higher prices in the U.S.:

"The outlook for the U.S. economy will continue to darken as long as the Strait of Hormuz remains effectively closed to oil-tanker traffic, even though the U.S. now produces about as much oil and natural gas as it consumes."

Today, we got stronger than expected producer price inflation which pushed back rate cut expectations to just one rate cut expected in 2026, which concurs with the FOMC decision later in the day:

"Chances for a December reduction stood at 60.5%, indicating that traders are leaning toward a cut, though with a relatively low level of conviction."

In other words, this war is having a DOUBLE impact on the economy, both directly through high oil prices and indirectly through interest rates. The Fed can't come to the rescue this time if the economy implodes due to oil.

This situation is now reminiscent of September 2008 when the Fed stood pat on interest rate cuts due to late cycle (oil-induced) inflation ironically caused by a conflict with Iran deja vu. What the Fed didn't know at the time is that the economy was already in recession and had been for NINE MONTHS already. But they were fortunately brought off of the sidelines by a market crash in October 2008.

The third and potentially worst impact is the Fed not knowing what the hell is going on with the economy due to the oil shock:

"But Powell emphasized that it's too soon to know for sure how the energy shock will play out. "The thing I really want to emphasize is that nobody knows," he said, speaking about the economic projections."

I'm sure it will turn out just great.

Of course the economic situation is even worse globally because EM and Europe are far more exposed to the economic impacts of an oil shock than the U.S.

So there you have it - the world's economy is now hanging by a string and Trump is coming more and more unglued by the day. He tried to punt his Hormuz disaster to the rest of the world over these past several days, but there were no takers. Trump has burned his bridges with U.S. former "allies" so there is no more trust left in the goodwill jar following a year of trade war and rampant buffoonery. It's the worst leadership we have seen in our lifetimes by an order of magnitude.

And now we learn that Trump is planning to "go it alone" and invade Kharg Island which is in the northern part of the Persian Gulf - and is Iran's primary oil loading terminal. The idea is to take control of that terminal and use it as bargaining leverage to re-open Hormuz Strait. However, Iran has already said that they will destroy the Gulf States oil infrastructure if the Kharg terminal is destroyed or occupied.

Which gets us to the financial markets finally.

Suffice to say that global markets have not priced in this current level of recession risk and oil shock risk. Why? Because ironically markets have been bailed out too many times by central banks and so the one time when central banks are LEAST able to support markets - they are the MOST complacent.

Look at this chart of the Global Dow, which includes U.S. stocks, relative to the VIX. You would hardly know there was an oil war taking place at all. Much less the largest oil shock in decades.

The most recent sentiment surveys confirm that neither hedge funds nor individual investors are positioned for a worst case scenario that's unfolding in real-time.

In summary, the Hindenburg Omens which I showed a couple of weeks ago warned of a bifurcating market - consisting of a few massively overbought AI winners relative to a large number of "losers" - happen to have been accurate in PREDICTING yet another major and critical market top. Even before the war started.

But now social mood is rolling over amid global turmoil.

Which means that the fate of the global economy and markets now hangs on Donald Trump.

Position accordingly.