MacroVoices #528 Luke Gromen: Hormuz Could Lead To a 1956 US Suez Moment

Key Concepts

• Strait of Hormuz: A critical maritime chokepoint for global oil transit.
• Logistics Lag Effect: The time delay (approx. 6 weeks) between a supply disruption at the source and the physical impact on global markets.
• Nonlinear Break: A sudden, exponential collapse in supply chains due to prolonged resource shortages.
• Synthetic Nitrogen Fertilizer: Essential for global food production; its scarcity threatens crop yields and population support.
• Sovereign Bond Market Stress: The interaction between rising yields, fiscal deficits, and the potential for central bank intervention (QE).
• Net International Investment Position (NIIP): A country's stock of foreign assets minus foreign liabilities, acting as a "piggy bank" during crises.
• Backwardation: A market condition where the spot price of a commodity is higher than the forward price, indicating immediate scarcity.

1. The Iran Crisis and Global Logistics

The central thesis presented by Luke Groman and Rory Johnston is that the market is dangerously complacent regarding the Iran conflict. While equity markets have rallied on the perception of a "peace deal," the physical reality is that the Strait of Hormuz remains effectively closed to major oil volumes.

• The "Air Pocket": Johnston explains that the last major tanker transited on February 28th. The global economy is currently running on the "tail" of that supply. The true scarcity—the "air pocket"—is only now hitting North America after having already impacted East Africa and Asia.
• VLCC Disruption: Very Large Crude Carriers (VLCCs) are not transiting in meaningful numbers. Even if a ceasefire were signed, the physical lag means oil will not reach global destinations for weeks, ensuring a supply crunch regardless of diplomatic headlines.

2. Economic and Humanitarian Implications

• Food Inflation: Groman highlights the Haber-Bosch process, noting that without synthetic nitrogen fertilizers, global population support capacity drops from 7.5 billion to 3.9 billion. A prolonged closure of the Strait threatens the current growing season, likely leading to severe food inflation and potential humanitarian crises in the Global South.
• Fiscal Stress: The US government is facing a "twin deficit" (fiscal and trade). With interest and entitlement obligations reaching 102% of receipts, the government is forced into a corner: either default or print money. Groman argues they will choose to print, which is inherently inflationary.

3. Market Dynamics and "Shaping Operations"

• Managed Markets: Groman argues that markets are not "free" but are being actively managed by the US administration (Bessant and Trump) to prevent a bond market collapse. He cites the $15 billion Treasury buyback as evidence of "shaping operations" to cap 10-year yields at 4.4%.
• The Dollar Debt Spiral: A cycle of higher yields leading to a stronger dollar, which crushes stocks, reduces tax receipts, and forces higher deficit spending, eventually leading to a "crash into the ground."
• Gold vs. Treasuries: Groman notes that long-term Treasury bond futures priced in gold are down 90% since 2014, suggesting a secular shift away from the dollar as a reserve asset.

4. Strategic Trade Frameworks

• Bond Positioning: Patrick Sznajder proposes a structured options trade on TLT (20-year Treasury ETF) to navigate the sequence of near-term inflation risk followed by a potential growth slowdown.
  • Methodology: Buy a January 2027 $87 call (long-term upside) paired with a short-dated June 2026 $85/$83 put spread (downside protection). This creates a defined-risk structure that benefits from both immediate bond weakness and a future rally in duration.
• Sector Preferences: Groman suggests focusing on energy, uranium, and domestic electrical infrastructure as these sectors are positioned to benefit from reshoring and supply chain bottlenecks.

5. Notable Quotes

• Luke Groman: "Government deficits and excessive debt don't matter until they do, and then they matter a lot."
• Luke Groman: "Hormuz is all that matters and every day that it stays closed brings us closer to a nonlinear break in supply chains."
• Rory Johnston: "It ain't over till it's over." (Regarding the status of the Strait of Hormuz).

6. Synthesis and Conclusion

The consensus view that the Iran crisis is resolved is premature and ignores the physical realities of global logistics. The "lag effect" ensures that the global economy will face a supply shock in the coming weeks, regardless of political posturing. Investors are advised to prepare for a volatile environment where inflation and fiscal instability dominate. The primary takeaway is to avoid "macro tourism" (short-term trading based on headlines) and instead focus on long-term structural hedges like gold, energy, and uranium, while remaining cautious of the "flow-driven" rally in equities, which lacks fundamental breadth.