MacroVoices #535 Michael Every: NAFTA and NAPTHA – Warcraft & Fartcraft

Key Concepts

• Economic Statecraft: A national strategy shifting from traditional demand-side management to using economic tools (trade, energy, currency, supply chains) to achieve geopolitical goals.
• Strait of Hormuz Blockade: A critical geopolitical bottleneck currently closed, causing a massive supply shock to global crude oil markets.
• "World of Warcraft": A metaphor for the current global environment where financialization is used to prepare for potential large-scale conflict.
• NAFTA (North American Petroleum and Hydrocarbons Trading Hub Association): A hypothetical "closed-loop" energy strategy for the US to prioritize domestic and allied energy security.
• Stablecoin Statecraft: The use of digital tokens to create financial "sorting" mechanisms, allowing the US to bypass traditional Eurodollar systems and incentivize allies.
• Nuclear Threshold State: Iran’s strategic position of maintaining the capability to build a weapon without officially crossing the threshold.

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1. The Geopolitical and Energy Crisis

The podcast highlights the ongoing closure of the Strait of Hormuz, which has effectively trapped 13–15 million barrels per day (bpd) of oil.

• The "Time" Debate: President Trump suggests the blockade could last until Labor Day (September), asserting that "time is on our side." Guests Michael Every and Rory Johnston argue the opposite, noting that the global system is rapidly depleting its "buffers" (commercial inventories and SPR).
• The China Factor: China has reduced crude imports by roughly 50% (from 12 million bpd to 6 million bpd). Analysts are debating whether this is due to massive, invisible underground stockpiles or a strategic decision to let the US bear the brunt of the crisis.
• Refining Margins: China’s domestic fuel price caps have caused refining margins to turn deeply negative, contributing to the collapse in refinery runs.

2. Economic Statecraft and the Federal Reserve

Michael Every argues that the era of "neoclassical" central banking (targeting 2% CPI) is ending.

• Kevin Warsh’s Role: As the incoming Fed Chair, Warsh is expected to align the Fed with the administration’s broader national security goals.
• Financial Far: Every suggests the Fed may move toward "targeted" support—using swap lines and stablecoins to fund physical infrastructure, mining, and military supply chains rather than broad-based quantitative easing (QE).
• Dollar Swap Lines: These are no longer just for the "old boys' club" of Western central banks; they are being used as geopolitical tools to secure energy-rich allies like the UAE.

3. Market Analysis and Logistics

• Crude Oil: Despite the supply shock, prices have remained surprisingly contained (trading near $96–$98). Rory Johnston attributes this to the "jawboning" effect of President Trump’s social media posts, which have successfully scared speculators out of the market. However, he warns that once physical inventories hit "precarious" levels, the price reaction will be unstoppable.
• Gold: Gold has failed to act as a traditional safe haven during this conflict. Every suggests this is because gold is physically difficult to move during a crisis, whereas fiat currency can be moved globally with a button press.
• Equities: Patrick Sznajder notes that the S&P 500 is showing signs of exhaustion after a near-vertical rally. He advises caution and hedging, as the market is overbought on almost every technical metric.

4. Step-by-Step Framework: The "Industrial Rebuild" Trade

To capitalize on the shift toward the physical economy, the hosts propose a specific framework:

1. Identify the Theme: Shift from financial asset speculation to physical infrastructure (ports, energy, manufacturing).
2. Select the Vehicle: Use the PAVE ETF (US Infrastructure) for long-term exposure.
3. Risk Management: Pair the long position with a near-term protective put (e.g., July 17th $55 strike).
4. Objective: This allows for participation in the industrial rebuild while providing a "floor" against a potential summer market correction.

5. Notable Quotes

• Michael Every: "Central banks understand supply-side or structural supply-side shocks like a fish understands a bicycle."
• Michael Every: "We’re now living in a 'World of Warcraft'—using financialization to try and prepare for a real world of war."
• Rory Johnston: "I’ve always argued that commodity markets are not forward-looking, and then I was shocked when they weren't forward-looking."

6. Synthesis and Conclusion

The consensus among the guests is that the global financial and geopolitical architecture is undergoing a fundamental shift. The "rules-based order" is being replaced by "economic statecraft," where energy security and physical industrial capacity take precedence over traditional market efficiency. Investors are warned that the current "calm" in oil prices is likely a temporary result of speculative exhaustion and Chinese inventory management, and that the underlying supply-demand imbalance remains a significant, unresolved risk that could trigger a sharp, volatile move in the coming months.