MacroVoices #538 Lyn Alden: Is The War Really Over and What’s Next For Markets?

Key Concepts

• Fiscal Dominance: The theory that fiscal policy (government spending/deficits) exerts more influence on the economy and asset prices than monetary policy.
• Stablecoin Statecraft: The strategic use of US-dollar-backed stablecoins to maintain global demand for the dollar and US Treasuries.
• K-Shaped Economy: An economic environment where asset owners and those in AI/tech sectors thrive, while others struggle with inflation and housing affordability.
• Contango: A market condition where the futures price of a commodity is higher than the spot price, creating "negative roll yield" for ETFs that hold front-month contracts.
• Network Effects: The phenomenon where the value of a currency (like the USD) increases as more people and businesses use it, creating a "sticky" global demand.

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1. The Strait of Hormuz and Geopolitical Risk

The conflict in the Strait of Hormuz appears to be de-escalating, with traffic returning to normal. However, Lyn Alden cautions that the situation remains fragile. The "Memorandum of Understanding" lacks critical enforcement details regarding uranium enrichment and on-site inspections.

• Market Impact: Crude oil prices have sold off, dropping below the 200-day moving average (WTI at ~$69).
• Strategic Insight: Alden suggests that nations should use this period of lower prices to refill strategic and commercial reserves rather than assuming the crisis is permanently resolved.

2. Federal Reserve Policy and Liquidity

Under new Fed Chair Warsh, the central bank has maintained a hawkish tone to preserve credibility despite political pressure for rate cuts.

• Balance Sheet: Alden argues against the "big QE" narrative, favoring a "gradual print" scenario. The Fed is likely to prioritize liquidity in the Treasury market, potentially through deregulation that allows banks to hold more debt, which acts as a pro-liquidity, pro-inflationary force.

3. Fiscal Deficits and the "Two-Speed" Economy

Alden argues that US deficits will likely remain in the mid-to-high single digits as a percentage of GDP.

• The "North Star": Fiscal policy is the primary driver of asset prices. Large deficits support nominal asset values, benefiting those who own assets and carry long-term debt (e.g., 30-year mortgages).
• Social Consequences: The disconnect between fiscal spending (directed at consumption/wealthy entities) and the struggles of young families (housing affordability) is a primary driver of rising populism and political polarization.

4. Stablecoins and Dollar Demand

Stablecoins are viewed as a tool that reinforces the dollar’s global dominance.

• Mechanism: Stablecoins create organic, bottom-up demand for the dollar, particularly in emerging markets (e.g., Nigeria).
• Treasury Demand: While stablecoins increase demand for Treasuries, Alden notes that the scale of the current US deficit dwarfs the potential demand generated by stablecoins, meaning they are a "reinforcement" rather than a "magical fix."

5. The AI Trade: Bubble or Structural Trend?

The AI sector is currently driven by massive capital expenditure (CapEx).

• Valuation vs. Fundamentals: Companies like SpaceX and various AI firms are trading at extreme multiples (e.g., 100x price-to-sales). While these valuations are decoupled from fundamentals, they create a feedback loop that allows companies to raise capital and "meme themselves to success."
• National Security: AI is an arms race. The US cannot afford to cede leadership to China, which has a significant advantage in energy infrastructure and industrial capacity.
• The Energy Bottleneck: The real constraint on AI is not just chips, but electricity. Alden notes that while data centers face local pushback (noise, water, power costs), these are solvable problems. She remains skeptical of "orbital data centers" (SpaceX) as a viable investment within a 5–10 year horizon.

6. Trade of the Week: Natural Gas

Patrick Ceresna highlights the "power bottleneck" as a second-order effect of the AI buildout.

• Methodology: He advises against using the UNG ETF due to the "negative roll yield" caused by contango in the futures curve.
• Actionable Strategy: For delta-one exposure, UNL (which ladders exposure across the curve) is cleaner. For options traders, he suggests bull call spreads on the December 2026 natural gas futures to capture the long-term thesis while avoiding front-month distortions.

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Synthesis and Conclusion

The macro landscape is defined by a "two-speed" economy where fiscal dominance and AI-driven CapEx keep asset prices elevated despite underlying structural issues. While the Iran conflict has cooled, the long-term risks—persistent deficits, energy constraints, and the potential for an "internet-style" bubble burst in AI—remain. Investors are advised to focus on hard assets and energy infrastructure, while remaining wary of the "forced selling" currently impacting commodities like oil and gold. The US dollar remains the global reserve anchor, bolstered by the network effects of stablecoins, but the sustainability of this system depends on the US government's ability to manage the energy and fiscal trade-offs inherent in the AI era.