On May 13, the International Energy Agency (IEA) published its Oil Market Report – May 2026. The findings were alarming. As the report pointed out, crude oil supply from the Gulf countries had declined by 14.4 million barrels a day (mb/d). Other countries increased output by around 1.6mb/d, resulting in an overall loss of 12.8mb/d. The market went from a surplus up until February to a significant deficit in just two months.

However - existing oil stockpiles are huge, billions of barrels even in conservative estimates. Certainly enough to plug the gap for at least a year.

Why, therefore, did Fatih Birol, head of the International Energy Agency, warn about energy shortages coming as early as June?

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The Iran situation keeps getting more confusing. There’s little doubt that U.S. President Donald Trump hasn’t got a game plan how to end the war he started three months ago. Military action hasn’t done anything to achieve his goals. Project Freedom, touted as the largest naval operation of all time, fizzled out in under 36 hours without any meaningful result. His most recent appeal to Gulf nations and Southwestern Asian countries to join the Abraham Accords didn’t resonate in the region. Global leaders increasingly consider his rapid-fire Truth Social postings, which oscillate between “civilizational destruction” and imaginary peace deals within hours, no more than random noise.

All the while, the Strait of Hormuz stayed closed. Global crude supply has declined by 12%, and oil markets went from oversupply as recently as in February to severe deficiency. Apparently however, even oil prices have decoupled from events on the ground. Oil futures prices are the lowest since early March, which implies an end to the war in days – while key positions under negotiations for a peace settlement, like uranium enrichment, are diametrically opposed.

Oil prices and available quantities are therefore a function of two parameters:

1. Expected timeline for opening the Strait of Hormuz

2. Existing oil repositories which have plugged the gap to demand so far

Billions of barrels of oil are held in strategic and commercial repositories, which should last at least another year even at large drawdown rates (observed drawdowns amounted to 4 million barrels per day in April, but real rates are probably much higher as a mathematical necessity).

And in fact, the global crude supply chain has demonstrated remarkable flexibility when compensating the loss of Gulf country output. Residual stockpiles are huge - “billions of barrels”. But there’s a catch which is beginning to hurt. As songwriter Alanis Morissette put it in her most famous song (“Ironic”),

“It’s like ten thousand spoons when all you need is a knife”.

Storage conundrum

Crude oil is stored in transit (tankers, pipelines), at resellers, refineries, and at strategic repositories (the IEA requires net importers of oil to keep at least 90 days inventories). Here’s a back-of-the envelope count of global reserves.

Commercial inventories, including mainly crude terminals, reseller storage, and industrial inventories. They are the backbone for buffer reserves. According to the IEA, drawdowns in April alone amounted to 170 million barrels. The total stock in OECD countries is around 2.5 billion barrels, visible stock in non-OECD countries around 1.5 billions. In total 4 billions, with an error range of 3.5 – 4.5 billions. But unfortunately, they can’t be viewed as a global fungible pool. Much of the total is locked by operational minimum storage levels to keep pipes full and system pressures intact; stranded geographically as total transport capacity is fixed in the short term; mismatched for refinery needs. Of the notional volume, probably no more than about 1.5 billion barrels are fungible.

Strategic petroleum reserves (SPRs): Global SPRs are estimated at 1.5 – 2 billion barrels. 400 million barrels have been authorized for release, of which more than 160 million have been consumed at a run rate of 2.5 million a day, according to Fatih Birol, head of the IEA. But release requires political approval processes. Politicians have approved the initial batch in the expectation to bridge a short-term disruption. Additional release may be much more difficult to obtain.

Oil in transit: At any point in time, about 1 billion barrels are being shipped around the world on tankers. However, that’s not spare capacity but committed cargo; essentially part of the supply chain. Maybe just around 100 million barrels can be redirected – not enough to quality as meaningful buffer

Tanker traffic actually makes the supply problem worse. Total tanker capacity is fixed in the short term, but tankers have to take much longer routes to avoid chokepoints, or to supply geographically much more distant markets. Instead of sourcing from the Middle East, European countries are buying from Nigeria and Brazil. It’s much worse for Southern Asian countries. As travel time increases, transport capacity goes down - a widely underappreciated system constraint.

Pipelines and refinery inventories: Because of their enormous capital intensity, refineries are finetuned for maximum efficiency. Throughput is just 12-24 hours. Inventories average 25 days – essentially an operational buffer, not a strategic reserve.

Pipelines don’t work if they are not full. If they aren’t continually refilled at the far end, you can’t pull anything out at the near end. In total, reserves at refineries and in pipelines are basically work in progress and don’t serve as buffer systems.

Uneven regional split: Regionally, inventories are unevenly distributed.

Large inventory holders include

• US Gulf Coast

• China

• Rotterdam/ARA

• Japan

• Korea

• Singapore

Vulnerable importers

• South Asia

• Southeast Asia

• East Africa

• smaller European states

• island economies

Mind the gap

The key issue about the loss of Gulf countries output isn’t just the notional amount. Gulf countries supplied a very specific quality of oil – unfortunately the central feedstock for global transport.

(Regular readers will remember this chart from a discussion about Venezuela. Source: THE ECONOLOG)

So, the global oil economy isn’t just rejuggling and rerouting, it also has to compensate summarily for the loss of a central feedstock. You might remember what I pointed out previously - oil refineries do not simply “make fuel.” They are highly optimized chemical systems designed around specific crude slates. Different crude oils contain different proportions of hydrocarbons, sulfur, metals, and density characteristics, which strongly influence the refinery’s final product mix — gasoline, diesel, jet fuel, LPG, asphalt, petrochemical feedstocks, and residual fuel oil. Each stage of the process – from initial distillation to separate main components, processing, etc – requires separate machinery. To maximize efficiency, the overall layout is calibrated to a standard input (for example, medium-grade crude from a specific region) to produce a main output (e.g., diesel), accompanied by ancillary products.

While refiners can adjust operations within limits, the output ratios are not infinitely flexible. Substituting a very different crude grade often reduces efficiency, lowers yields of desired products, and increases processing costs. Each of the process steps which were previously aligned for seamless operations can now become a bottleneck – because the new feedstock contains more sulphur, or different metals and crude grades. The process is suddenly constrained by the lowest common denominator, and efficiency declines rapidly.

As it turns out, the “inventory totals” framing is actually misleading in oil crises. Inventories aren’t one giant fungible pool. A single pool would require perfect mobility, substitutability, and instant availability. None of those factors is present. Reserves are fragmented geographically, by quality, ownership, infrastructure, regulation, refining compatibility, and transportation constraints.

Rather, the oil system should be fundamentally viewed as a processing engine, not a storage system. Reserves at different level of the system were set up not for storage, but to keep the system running efficiently with controlled buffers – with the exception of SPRs which the IEA mandated for net importers of crude (in fact the U.S. SPR was set up in response to the 1973 oil crisis, when the U.S. was a large importer).

Large mismatches are building in the overall oil supply chain – at refineries (the IEA reports that throughput is declining), geographically, and in product space. Modern oil markets are stable not because inventories are large, but because inventories are flexible. Once flexibility disappears, even seemingly large reserves become operationally irrelevant.

In the end, this is what the IEA is worried about - by summer, the easy substitutions will have been exhausted. The next layer of adjustments will be more time-consuming, more difficult, and much more expensive. Refineries can adjust operations to some degree, but eventually substitutions in feedstock will require massive financial investments. The real problem isn’t a hard limit on supply, but the adjustment processes to rebalance all those mismatches.

From historical experience, they include:

• recessions,

• demand collapse,

• rationing,

• price spikes.

Those adjustments will hit unevenly. Most oil traders and analysts sit in London and New York, geographies where reserves are still abundant and economies have financial and fiscal buffers. But the output gap is already hitting hard in other parts of the world through real fuel shortages and second-order effects like rapidly rising transport costs and inflation, including South/Southwest Asia (Pakistan, India), and countries across the African continent.

The global oil economy is currently operating in makeshift mode, applying band aid patches here and there, “and call me tomorrow if it doesn’t get better”. But the patient needs open heart surgery.

Let me know what you think,

All the best,

John

On September 16, 2025, I posted my piece “Peak Trump”. I pointed out that Donald Trump’s whirlwind of initiatives was running out of steam, and Trump was losing escalation dominance in critical areas of global influence – while China was emancipating and stopped playing along. In that piece, I also suggested that Trump would launch a major initiative in the Middle East to reestablish authority1.

And here we are. Instead of turning around the momentum of his presidency, the Iran War accelerated the secular forces working against the U.S. They way Trump was received when he arrived in China – just ceremonial figures and Chinese schoolchildren waving Chinese flags showed up at the airport – foreshadows the repositioning of the U.S. in the eyes of global allies and adversaries.

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Thucydides was an Athenian general and the world’s first political scientist. He lived in the 5^th century BC and was the first writer to chronicle contemporary wars without references to the intervention of gods, but from an impartial cause-and-effect viewpoint. Famous texts include the Melian Dialogues, an episode in the Peloponnesian War in which dominant power Athens bullied much smaller island Melos to join its military alliance “or face total destruction” (rings a bell?) – a story which political commentators have invoked in recent months to reflect on current events.

Thucydides’ most famous contribution was a generalized observation about the Peloponnesian War – “it was the rise of Athens and the fear that this instilled in Sparta that made war inevitable”.

In 2011, American political scientist Graham Allison coined the phrase Thucydides Trap for this dynamic – in a confined space, the rise of a competitor will necessarily lead to war with the incumbent power.

When Chinese President Xi Jinping met U.S. President Donald Trump on Thursday, May 14, he used the term in his opening remarks. “Whether China and the United States can transcend the so-called Thucydides Trap and create a new normalization of relations between major powers; whether we can join hands to address global challenges and inject greater stability into the world; whether we can advance the well-being of the peoples of our two countries and the future destiny of humanity, and jointly create a better futures for bilateral relations,” Xi said.

The disbalance of global oil markets deepened again in April. According to latest IEA numbers, released on May 13, output from Gulf countries was 14.4 million barrels/ day (mb/d) below pre-war levels. Higher production from other regions, notably the Atlantic Basin, compensated some of it but total losses since February amount to 12.8 mb/d. Even though demand declined as well (a phenomenon called demand destruction), the global output gap is now around 9mb/d vs. a surplus up until February. Reserves in transit, local tanks, at refineries, and at strategic repositories are draining “at a record pace”, as the IEA noted. Chinese seaborne imports fell by 3.6 mb/d, according to logistics analytics firm Kpler.2

The U.S. government has long recognized there was a mutual dependency between Iran and China. The Chinese economy is critically dependent on Iranian oil, and in turn Iran received foreign funding from China for its own economy, setting up a mutual vulnerability. The Trump administration attacked in this area of weakness when it imposed sanctions on five Chinese “teapot” refineries, independent processors whose viability depended on imports via shadow fleets at discount prices, already in March 2025. According to U.S. laws, American sanctions extend not only to U.S. companies, but also to “U.S. persons” and the use of the dollar for transactions. Therefore, even though this is American law, sanctions have global reach and effectively cut sanctioned companies off from financial markets (including access to U.S. banks, the SWIFT system, dollar clearing, and Western capital). On April 26, out of frustration how the Iran War went, Trump turned up the heat. The American Office of Foreign Assets Control (OFAC, the Treasury department which imposes and administrates sanctions) designated Hengli Petrochemicals as well, China’s second-largest refinery and a major buyer of Iranian crude – a clear message and a major escalation.

This time however, China decided it would not comply. On May 2, China’s Ministry of Commerce invoked China’s Blocking Order in response – laws which were introduced in 2021, and which were intended to counter the extraterritorial reach of foreign sanctions.

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American policymakers have spent the last 50 years creating a fabulous economic flywheel. It has created huge benefits for the U.S. economy, and its imbalances were picked up by global markets.

Donald Trump has decided to pull out, unwittingly, a key pillar of the flywheel, and the effects are already showing. Economic statistics point to a worrisome reversal of capital flows. At the same time, the original basis of it - global oil trade dominated by OPEC - is crumbling. The convergence of those two developments triggered drastic action of a Middle East country this week.

It’s another episode inside the broad trend of fragmentation of trade, markets, and zones of interest – read it first on The Econolog!

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On June 9th, 1974, U.S. Secretary of State Henry Kissinger and Saudi Prince Fahd bin Abdulaziz Al Saud concluded an inconspicuous agreement between the USA and Saudi Arabia, setting up the “Joint Commission on Economic Cooperation”.

The language in the contract was vague. The commission was supposed to foster closer political ties between the two countries, assist Saudi industrialization, and facilitate the flow of American goods, services, and technology to Saudi Arabia.

The real targets of the partnership were not spelled out: Saudi Arabia was expected to produce enough oil to stabilize world demand “at stable, and hopefully lower prices”; in turn, the U.S. would provide Saudi Arabia with suitable investment opportunities for oil sales proceeds1.

At the time, world oil trade was in chaos. After decades of stable prices of just $3 per barrel of oil, prices were spiraling out of control. Major Middle East oil producers had long been dissatisfied with their share in oil revenues, because western oil companies which produced, transported, and processed the Middle East’s resources took home the lion’s share of profits. Negotiations at the OPEC meeting in October 1973 in Vienna, Austria, didn’t go anywhere. When U.S. President Richard Nixon announced a large aid package for Israel, which was faltering in the Yom Kippur/ October War, it was the final straw for Saudi Arabia, OPEC’s largest producer. It cut oil shipments to the U.S. Other countries in the region followed. The embargo exposed a huge vulnerability of the U.S., by far the world’s largest economy and the biggest consumer of oil. Domestic production peaked in 1970 at just above 10 million barrels a day. By June 1974, it had dropped already well below 9 million.

Kissinger’s visit in 1974 set up a rough outline; a Wall Street banker put flesh to the bones. In July 1974, Treasury Secretary William Simon went on a roadshow in the Middle East with a four-day stop in Jeddah, a coastal city of Saudi Arabia. Simon had previously been a senior partner and head of the treasury trading desk at Salomon Brothers, a Wall Street investment bank which was quickly becoming the leading firm of that time specifically because of its bond trading capabilities.

Simon had a bond deal for the Saudis: now that oil was trading at more than three times its historic price, and the U.S. was picking up millions of barrels a day, surely the Saudis were looking for a place to invest their hard-earned dollars? Skilled salesperson that he was, he persuaded Saudi Arabia to invest much of its oil money back into U.S. treasury bonds, in addition to its vast purchases of U.S. military equipment. The petrodollar system was born.

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Guyana may be the smallest country in South America but it’s the fastest growing one. In a posting last summer, I pointed out how oil discoveries off Guyana’s coast revolutionized its economy, which has expanded by a factor of 5 since 2020 (I’ll add I was the first writer on Substack to raise Guyana – stay ahead and subscribe to The Econolog!).

Where there’s a lot of light, there’s also a lot of shadow – and dark players are already lining up. Will Guyana be able to defend its success model?

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In August 2006, David Packouz and Efraim Diveroli presented their pitch for one of the U.S. Army’s largest weapons procurement contracts ever. The U.S. government was getting desperate for better outcomes in the Afghanistan War and rearmed the Afghan military for its fight against the Taliban. The Pentagon issued a large tender for munitions, rifles, rocket launchers, mortars, and other gear, with a total deal volume of around $300 million. When they won the tender, Packouz was 24. Diveroli had just turned 21.

They had found the proverbial glitch in the system. Traditional military spending went largely to big defense firms, which were well connected to government insiders, without competitive bidding, due oversight or controls, potentially wasting billions of dollars in excessive bills. In response, the Bush government set up new policies which forced the Pentagon to set aside a minimum budget for smaller, independent companies to create more competition for government projects.

Diveroli and Packouz poured over thousands of tenders to identify loopholes – contracts for which large weapons manufacturers could not bid because they were not economic, or not even entirely legal. Already in 2005, Diveroli sold Russian-manufactured AK rifles worth $15 million to Iraqi security forces which the U.S. government equipped with Soviet-style weapons. Where did 19-year-old Diveroli get Russian rifles from? Nobody bothered to look. In the end, that was the whole purpose of the business model. Diveroli and Packouz were the middlemen who greased the flow of weapons in grey markets – weapons which were euphemistically called “non-standard” in a NATO context, for markets which the US government could not reach officially.

The Afghanistan deal, as it became known, was all of that – too illegal, but also too large to pass. It required several hundred million rounds of AK-47 munitions, but the main producer was sanctioned (China). Diveroli and Packouz got in touch with Swiss arms trader Heinrich Thomet, who had contacts with the defense ministry of Albania, a small Balkan country previously behind the Iron Curtain. It was a mutually beneficial relationship – Diveroli and Packouz needed Thomet’s network, and Thomet needed them to do business with the U.S. government (he was on the State Department’s Watch List). Albania still housed huge stockpiles of Soviet munitions, bought as early as in the 1960s and largely of Chinese origin. Packouz and Diveroli had them repackaged to conceal the origin. But when deliveries arrived in Afghanistan, much of it was rotten and unusable. The deal blew up in their faces. In the aftermath, Diveroli was sentenced to four years in prison for conspiracy to defraud the United States, but Packouz got away with seven months of house arrest.

(David Packouz, left, Efraim Diveroli, right)

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Are we in the end game of the Iran war? One day it’s civilizational erasure, the next day peace negotiations. But negotiations for what? Donald Trump started the war to engineer regime change (?) and failed. American oil executives are developing a taste for something quite different. But as Washington continues talking about crafting “its own plan”, it appears to be operating in a state of cognitive denial. The fundamental truth is: in this negotiation, Iran holds most of the cards. Who controls the Strait of Hormuz controls the outcome of the war.

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After a 5-week bombing campaign across Iran, Israel, and almost every country in between in the Gulf Region, Iran and the U.S. agreed on a cease-fire for two weeks to work on a lasting peace agreement. Iran sent a ten-point proposal to Donald Trump which Trump called “a workable basis on which to negotiate”. Iranian officials published the following items:

1. A binding pledge the US will not strike again

2. The Strait remains under Iran’s authority

3. Formal recognition of Iran’s right to enrich uranium

4. The end of direct US economic restrictions (including banking, oil exports, financial systems)

5. No more penalties on third countries doing business with Iran (i.e. “secondary sanctions”)

6. Termination of past UN Security Council resolutions (which formed the legal basis for global pressure)

7. Relief of International Atomic Energy Agency monitoring activities

8. Financial compensation for reconstruction

9. Pullback of American troops from Middle East bases

10. The Truce covers Iranian allies and halts hostilities against groups like Hezbollah

U.S. government officials quickly pushed back and said negotiations were about a different 10-point plan.

Donald Trump sent the U.S. into the war without any specific strategic deliverables, but a vague idea of regime change. The attack on February 28, called a decapitation strike, targeted the Ayatollah. His assassination was supposed to lead to a collapse of the theocratic state, the Islamic Republic, basically over the weekend. Somehow, the Iranian people were going to institute a new government which would make lots of deals with the U.S. and hand over its stockpiles of enriched uranium.

That plan, as basic and naïve as it was, failed. American interests are now shifting to two other targets: Iran’s oil, and control over the Strait of Hormuz.

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The line between a casino bet and a calculated trade has never been thinner. Not that long ago, “betting on the news” was an amateur game. But in recent weeks, millions of dollars were made in hours. Prediction platforms have made rapid advances and now operate with the speed, liquidity, and information-edge incentives of commodities pits – and will soon have a large impact on them. Time to take a closer look at an emerging risk!

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In 1983, Wall Street satire Trading Places was released to become one of the greatest comedy films and Christmas films ever. It launched the career of Eddie Murphy into superstardom.

In the movie, the cynical Randolph and Mortimer Duke run Duke & Duke Commodities, a large brokerage firm. They make a $1 dollar bet on their star trader, Louis Winthorpe III – will his killer instinct which he demonstrates daily at trading desks also enable him to survive when he’s stranded broke in the streets of Philadelphia? And can a jobless street hustler, given the right opportunity, become the next star banker? In a sinister experiment, the Duke Brothers frame Winthorpe for theft and drug possession and strip him of his job, his home, his fiancé, and his reputation. In his place, they elevate Billy Ray Valentina (Eddie Murphy), a street hustler, into a gentleman banker position at their firm.

But Valentine and Winthorpe team up. They realize the Dukes attempt to manipulate financial markets, stealing a governmental crop report which provides valuable information about the Florida orange harvest.

Valentine and Winthorpe replace the authentic crop report with a forgery. The Dukes are led to believe the orange harvest will be bad, and they start buying large quantities of futures contracts in the expectation that prices will rise. When the real report is released by the government, prices fall rapidly. The Dukes go bankrupt, and Valentine and Winthorpe, who bet against them, become rich. It turns out they made a $1 bet as well – “Louis bet me that we couldn’t both get rich and put you in the poor house at the same time. I won!”

The crazy thing about the movie – trading on confidential government information wasn’t even illegal at the time.

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This is the concluding part of a 3-piece series on Iran. I still stick with the scenarios which I laid out in early March, just after the war started – events have confirmed the trajectory, and I’ll provide some more details. We may be looking at the largest geopolitical transition since the collapse of the Soviet Union, and I think this moment deserves attention. Too much has been lost.

If you think I’m overly pessimistic, I’ll leave you with a quote of a famous comedian. “An optimist is someone who doesn’t take things as tragically as they are.”

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In April 1600, William Adams, an English navigator, was stranded near Nagasaki, Japan. He was one of the few survivors on board of the Liefde which had left Rotterdam two years earlier, part of a small fleet of five ships sailing to trade with South America.

The mission failed. The ships got caught in a storm, and the convoy split up. Most men on board died of starvation, some were killed by local populations of the remote islands they reached.

When Adams arrived in Japan, more dead than alive, he was brought before Shōgun Tokugawa Ieyasu, the military deputy of the Japanese Emperor. Tokugawa realized Adams was a valuable asset and knowledgeable about emerging power plays. European kingdoms were splitting up the world into spheres of influence, in the first truly global race for domination, led at the time by the Spanish and Portuguese crowns. Jesuit missionaries were already building influence in Japan. Adams’s real task had been to find trade routes to Japan and other Far East countries, a secret passage known only to Spanish and Portuguese sailors. As a practical consideration, the Liefde carried 19 cannons, and Adams trained Tokugawa’s soldiers how to use them.

But Tokugawa also realized Adams acquired significant intelligence on Japan, know-how that he didn’t want to spread to Western powers whose superior military technology would enable them to overrun Japan. He forbade Adams to leave for ten years. When he eventually got approval, he decided to stay anyway. Adams recorded his memories in notebooks which were brought to Europe many years later and eventually formed the basis for James Clavell’s novel Shōgun.

The novel contains an episode whose cultural significance is often overlooked. The British sailor prepares a proper English-style meal from a pheasant he received as a gift. He hangs the dead bird outside his house to dry-age the meat, a traditional European practice. The Japanese villagers, steeped in cleanliness and propriety, find the stench and sight of the rotting pheasant intolerable. But Blackthorne (the fictionalized Adams) is insistent – the bird stays. He tells the villagers, “You touch – you die!”, in a mix of most basic language skills, a healthy dose of European hyperbole, and very bad judgment.

One day the bird is gone. His gardener is gone as well. Blackthorne asks around. The villagers tell him they couldn’t deal with the smell any longer, and the gardener volunteered to remove the bird.

Ok, and where is the gardener now?

He got killed – just as you instructed us.

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last week’s posting created quite a stir in the community - thanks so much for your feedback! I’ve had several conversations about Iran’s weapons capabilities and nuclear development. Thanks for the prompt - here’s a deep dive. I think the answer is not what you expect. Hope this is an interesting read!

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February 4, 2003. New York City, a Waldorf Astoria suite. U.S. Secretary of State Colin Powell paced his hotel room like a maniac. Bursts of shouting into a telephone. “I’m not reading this! This is bullshit!” On the receiving end: staffers of Vice President Dick Cheney, CIA analysts, and his chief of staff Colonel Lawrence Wilkerson.

Pages of a PowerPoint presentation deck lay on the writing desk at the Waldorf Astoria, some pages on the floor. On the slides: technical drawings, details highlighted in exploded views. Trucks on the outside, chemical laboratories on the inside. Sophisticated enough to breed complex biological agents like anthrax and botulinum on the go. Other slides showed weapons depositories for mustard gas, VX gas and sarin.

(Mobile bioweapon facilities. Source: Slide 21 of Colin Powell’s address at the UN Security Council).

(Chemical weapon facilities. Source: Slide 12 of Colin Powell’s address at the UN Security Council. Nerve agents like sarin or VX manipulate the transmission of nerve impulses. Exposure leads to muscle twitching, escalates to full-body convulsions, and paralysis of breathing. A small droplet on the skin is lethal.)

(Centrifuge component for uranium enrichment. Source: Slide 31 of Colin Powell’s address at the UN Security Council).

Another slide showed an aluminum tube, supposedly used in centrifuges to enrich uranium. Random aluminum tubes as definite evidence of a nuclear program? The slides drove Powell into exasperation – he was expected to present evidence at the United Nations Security Council the next day, but Powell was certain: nobody was going to believe this bullshit.

U.S. President George Bush Jr. had asked him to deliver the notes because Powell had a stellar reputation as a credible, no-nonsense authority. But after presenting that material, he knew, his reputation was toast.

(February 5, UN Security Council. Colin Powell delivering his famous speech. CIA Director George Tenet (left, behind Powell) literally covering his back.)

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Greek historian Herodotus recorded the story of King Croesus, a man of unimaginable wealth and the last king of Lydia who lived in the 6th century BC.

Croesus was worried about the rise of the Persian empire. He considered a military campaign but consulted the famous Oracle of Delphi for advice.

The Oracle told him, if he should march against the Persians, he would destroy a great empire.

Croesus felt encouraged – but his army was defeated, and the empire which fell was his own.

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Prophet Muhammad, the founder of Islam, died in 632 without a designated successor. A majority of Muslims believed his successor should be chosen from his companions and elected Abu Bakr, a close friend, as the first caliph (deputy). The group eventually became known as Sunnis, from “Sunnah”, the traditions and practices of Muhammad as interpreted by this community.

A smaller group however believed that Muhammad wished that leadership remained within his family, invoking a famous sermon of the prophet in which he designated his cousin Ali ibn Abi Talib. That group became known as Shia, from “Shiat Ali” meaning “Party of Ali”.

Both factions claimed leadership, but Sunnis initially prevailed. Civil wars followed, and leaders of both factions were murdered. In 680, a son of Ali, Husayn, started a new campaign to wrestle leadership from Sunni leader Muawiya ibn Abu Sufyan. His mission was intercepted at the city of Karbala (today: Iraq) and massacred in a brutal battle.

The Martyrdom of Karbala became a foundational myth for Shia Muslims. Husayn turned into a symbol for sacrifice and opposition to oppressive rule which Shia Muslims commemorate annually.

Operation AJAX

Iran first became a pawn of geopolitical interests in 1953, when Iranian Prime Minister Mohammad Mosaddegh nationalized the Iranian oil industry. The industry had previously been dominated by the British-controlled Anglo-Iranian Oil Company (today: BP/ British Petroleum) which was building its stake in the first global oil boom in the 1950s, a period of rapid international industrialization.

Iran was a constitutional monarchy but with a democratically elected government. To maintain western influence, the CIA together with the MI6 orchestrated Operation AJAX, a coup d’etat which removed the Mosaddegh government and strengthened the power of the Shah, who hadn’t been more than a ceremonial figure under the Mosaddegh government.

The Shah was initially viewed as a modernizer and reformer, but his power eroded soon. Not a first in economic history, the huge money that arrived from resource wealth led to bribery, embezzlement, corruption, and nepotism. As dissent with the Shah increased, he responded with brutal repression, imprisoning and torturing opponents. Economic disparity increased rapidly as wealth from oil went disproportionately to urbanites and the Shah’s inner circle. And the westernization alienated religious conservatives who saw Islamic values eroding.

Opposition groups eventually united under Ayatollah Khomeini, an exiled opposition leader. When he returned to Tehran in February 1979, the Shah’s regime was already weakened from months of violent protest across the country. The Shah fled, and Khomeini took over just days after his return. He established the Islamic Republic, a theocracy with Khomeini as the Supreme Leader.

Maximum escalation

Attacks on Iran started in the morning of February 28, 2026, with a surprise strike on the Tehran compound of Ayatollah Khamenei, Khomeini’s direct successor. It was carried out by Israeli missiles and intended to be a preemptive maneuver to remove Iranian leadership. The attack was marketed as a resounding success, as Khamenei und several other top leaders were killed. Intelligence analysts had collected ground data for months about daily routines, itineraries, and meetings of Khamenei but were still pleasantly surprised by the effectiveness of the attack.

But Iran answered with a counterstrike whose full impact still hasn’t filtered through. It attacked Saudi Arabia’s largest refinery Ras Tanura, one of the world’s biggest with an output of 550,000 barrels/ day with simple, slow drones and forced it to shut down. It destroyed a billion-dollar surveillance installation in the UAE, the THAAD radar station, supposed to monitor missiles thousands of kilometers away. It attacked U.S. military bases across the countries on the Persian Gulf, making operations on them much more difficult or even impossible.

Iran’s strategy: turn the war into a regional conflict, and thin out anti-missile defense. The U.S. only has so many rockets; the more countries they have to protect, the bigger the gaps in the shield.

On Sunday, March 1, Iran radioed an uncoded message across the seas to every vessel: stay off the Strait of Hormuz. Passage isn’t safe any longer.

Western intelligence analysts had thought that the Strait was a no-touch area for Iran to maintain goodwill with the Arab countries in the region. That belief turned out to be wrong if not naïve. Right at the time the world is transitioning to natural gas as the key carrier, Iran shut down the passageway for 25% of global LNG trade, and 20% of global oil trade. Maximum escalation had arrived much earlier than expected.

Qatar was forced to shut down production of natural gas but also intermediate and final chemical products like ammonia and fertilizers. Qatar serves mostly Asian markets, and regional gas benchmark prices jumped by 30%. European gas benchmarks (TTF/ Title Transfer Facility) have spiked by 85% in just two days.

Regime change?

The underlying goal of the U.S.-Israel coalition is to force another regime change in Iran. The strategy to get it done follows the failed template of the 1991 Iraq War. You will remember the U.S. bombed Iraq for four weeks, expecting to weaken Saddam Hussein’s regime so badly that Iraqis could finish the job themselves – Iraq was internally already divided with three competing population groups, a Shia majority, and Sunni minority, and Kurds in the north. Shias and Kurds had long been violently oppressed by Hussein who didn’t even hesitate to use biological weapons (VX nerve gas) to suppress uprisings. But despite the bombing campaign, Hussein squelched a revolution after the war before it even began.

Iran is a completely different challenge in every dimension.

• Contrary to almost all Arab nations in the region, it was not created on western politicians’ drawing boards after World War I, but it has existed as a sovereign territorial entity for thousands of years – one of the oldest continuous civilizations mentioned first already in the 7^th century BC.

• Shia faith is characterized by its strong, central spiritual authority represented by the Ayatollah and strong hierarchies (in analogy to Christianity, Shias are the Catholics with strong spiritual leadership by the pope) – in stark contrast to Sunni Islam which is more decentralized and lacks a single religious authority. Religious scholar and local imams operate with significant authority, unthinkable for Shia Islam1.

• Iran is the only major country with a Shia majority and a government which is explicitly a Shia theocracy. As a theocracy, the clergy is intertwined with bureaucracy which provided strong control of the country in the past.

No doubt, political opposition against this theo-political system has been building. Growing parts of the population believe it has failed to develop the country. The system prioritized ideological purity (brutally expressed through the IRGC and morality police) over economic and social progress, which led to new unrest and several protest waves including the January 2026 protests which resulted a in large number of casualties – the true extend is unknown. It seems that a majority of the population now favors a separation of state vs. religion, abandoning theocracy, and a democratically elected government. Those views are supported mainly by the younger and urban population. But are they prepared to go into civil war with the IRGC which is very well organized, equipped, with power structures which reach into every corner of the country? The theocracy is more deeply entrenched than most western politicians like to believe. From this perspective, the attack on Ayatollah Khamenei may actually have been counterproductive. Khamenei fully understood Israel was coming for him but still stayed in his residence. As a man of faith, in fact the most senior spiritual leader, who was he to defy Allah’s will? If his hour had come, so be it – inshallah. His death likely strengthened the resolve of traditionalists.

In Iraq, the uprising failed even though it included battle-hardened fighters especially among the Kurds, and the government represented only a minority in the country and had much less legitimacy. Regime change was brought only in 2003 and with 100,000 boots on the ground. It also resulted in the forever wars.

Energy prices

Make no mistake, we’re looking at the biggest disruption in oil supply ever. If the war keeps going even for only a few weeks, the impact will be much larger than in previous episodes of price shocks like the embargoes in the 1970s.

The rise in the last three days (+20% of key benchmarks like WTI and Brent) reflected a “war premium” (heightened uncertainty) but no supply disruptions. Once strategic reserves are depleted, which will happen in a few weeks, oil prices will start climbing by much more. Just projecting prices based on the experience of the 1973 and 1979 embargo shocks (+300%/ +250%) will result in prices of $200/ barrel2.

If the Strait remains shut, they might go much higher. The world economy cannot deal with a 20% decline in oil supply. The Strait of Hormuz has become the most critical asset in the conflict. Who controls the Strait controls the outcome of the war.

The question now is, what can the U.S. do to gain control?

On March 3, Donald Trump put out a Truth Social posting ordering the United States Development Finance Corporation (DFC) to provide insurance to tankers crossing the Strait (regular insurance companies don’t provide cover any longer in the region). He also said the Navy would provide escorts for safe passage.

How is the Navy supposed to provide cover to dozens of tankers daily? The Navy has 12 warships in the region. They have made sure to stay out of reach of Iran’s missiles (which are believed to have a radius of up to 300 kilometers). Crossing the Strait would bring them to a distance of 30 kilometers or less to Iran’s coast. It’s very easy for Iran to saturate the defense capabilities of a single ship or even a small convoy, especially considering there’s almost no lead time for countermeasures. Iran has spent at least 20 years building hidden, fortified missile launch bases along the coast.

Trump’s idea isn’t more than a desperate hipshot. The worst thing about his post? It’s reactive. It demonstrates the U.S. has lost the strategic initiative, only four days into the war.

Scenarios for the endgame

In a hardline scenario, Iran’s position is pretty straightforward: sit out Israeli/ U.S. bombing for a few more weeks and watch how oil stocks in the rest of the world are depleting. Even the U.S. is at risk, because its refineries are calibrated for Middle East oil qualities. Japan is 90% dependent on Middle East oil after turning off the Russian tap. Western countries will beg for peace negotiations which will largely follow Iran’s terms.

Minimum viability scenario: Iran will allow some traffic through the Strait in exchange for deliveries of critical supplies into the country, taking off pressures on both sides. But it will prolong the war with attrition on both sides, and a disadvantage building on the Iranian side.

Forced opening of Hormuz: the U.S. pries open the Strait. The chances of success are essentially zero.

Winners/ Losers

Winners:

• The U.S. energy industry becomes the only global low-risk super producer.

• Vertically integrated energy companies like Exxon, Chevron, ENI

• Russia, which sells oil at higher prices and sees much higher demand

Losers:

• Consumers worldwide

• Asian energy importers incl. India, China, and Japan

• Ukraine, as air defense systems/ restocking get diverted to Israel

• Europe, the biggest loser suffering the biggest price increases because of massive imbalances in its energy sector.

The decision to go to war with Iran was a huge mistake. It failed to consider a crucial escalation scenario and to define a clear off-ramp – what is the U.S. definition of success, and how can it get out? If there’s residual sanity left, the war will probably end with a humiliating retreat of the U.S., the end of sanctions against Iran, and higher risk premiums for energy products for several months. King Croesus is a classic example of hubris and the danger of misinterpreting warnings.

Let me know what you think,

All the best,

John

A century ago, a Greek teenage emigrant made his first money in shipping. He went on to create one of the most mythical business empires in the 20^th century. Today, a similar transformation is taking place, offering even larger opportunities. It is an offshoot of the LNG revolution which has received little attention – be the first to read about it here!

Hope this is an interesting insight. If you, please drop a like, comment, and share - this is ever so helpful to get broader traction. Many thanks!

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Aristotle Onassis was born to Greek parents in the Greek zone of Smyrna (today’s Izmir) in Turkey in early 1906, almost exactly 120 years ago. When Turkish troops took Smyrna in 1922 during the Greco-Turkish War, the town was set on fire. Several hundred thousand Greek and Armenian refugees were locked on the city’s waterfront, waiting for an evacuation – among them the Onassis family.

In 1923, Aristotle Onassis arrived in Buenos Aires, Argentina, at the time one of the fastest growing and most prosperous countries in the world. His first job landed him at the British United River Plate Telephone Company as a phone operator. The job allowed him to eavesdrop into confidential business communication. Backed by the intelligence he collected, Onassis launched an import business for Turkish tobacco which earned him his first batch of serious money.

A few years later, Onassis spotted the next opportunity. In the years of the Great Depression, unused freight ships sold for rock-bottom prices. Even though Onassis had relocated to New York by that time, he registered the vessels under “convenience flags” in countries like Panama and Liberia. That setup enabled him to operate his fleet at low costs. It also proved very convenient when World War II broke out – neither the Allies nor Germany could seize or confiscate his ships, sailing under independent flags.

When the war ended, Onassis was already running a solid business. But now, in his early 40s, Onassis made a legendary move which created one of the biggest fortunes of his time.

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Just when you think all is lost, there’s a flicker of light. Last week, a surprising earnings report came across my desk, incidentally the same day that Donald Trump announced his decision to revoke the “endangerment finding” of greenhouse gases. In fact, the report and his decision are closely related. They might even show a way out of Europe’s never-ending crisis. Another contrarian story – hope you like it! If so, please drop me a like, and please let me know your thoughts! This forum lives from dialogue.

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In September 2020, German industrial giant Siemens spun off its power production unit. Siemens is Germany’s largest company by market cap (almost 200 billion euros) and ranks #2 in the country’s lead index behind software producer SAP. Siemens was founded by electrical engineer and inventor Werner Siemens who incorporated the first subsidiary in 1847. The company built the world’s first telegraph and the first long-distance telegraph line. Siemens invented the dynamo, an electrical generator with permanent magnets. It built the first electrical generators and AC alternators. George Westinghouse, an American inventor who pioneered the use of AC (alternating current) electricity, based his designs on Siemens technology. Siemens developed electrical trains, streetcars, light bulbs, and electrical transmission systems – the foundations of an electrical economy. As the company grew, it scaled up its competencies. In addition to electrical devices, it became a technology leader in powerplant design including nuclear power generation.

By 2011, Siemens was a sprawling conglomerate with subsidiaries in every corner of the world. But that year, its fate changed. On May 30, 2011, German chancellor Angela Merkel held a press conference in which she announced that Germany would exit nuclear energy generation by 2022. It was the formal launch of the country’s energy transition. Merkel said that nuclear risks were not tolerable any longer after the Fukushima accident which had happened just a few weeks before. But Fukushima was just a scapegoat. In spring 2011, Germany had reached full operational capacity in a gas pipeline from Russia – NordStream 1. Merkel believed that Russian gas had her back when she decided to shut down nuclear generation.

But the Siemens share price tanked. It went from €95 in May 2011 to €67 in August and continued to slide to new lows in 2012. The power generation unit, formerly industrial pride, transformed into a liability. Siemens had leading competencies in the construction of large generators and turbines, 100-ton flywheels which rotated at 3,000 spins per minute; it didn’t have any noteworthy competencies in solar panels or glass-fiber windmill wings.

Siemens decided to pull the plug. It consolidated its power production business into Siemens Energy and spun it off in an IPO in late September 2020. The stock languished in markets. The wind energy division, Siemens Gamesa, experienced manufacturing quality issues leading to repair costs (and drops in production for owners) and loss of sales. Pushback against wind energy parks gained strong momentum, and an increasing number of projects had to be cancelled. Financial results of the unit are a sea of red ink. The hydrogen unit of Siemens Energy doesn’t even pretend it can be operated profitably. When Siemens opened its first hydrolyzer plant in Berlin a little more than two years ago, business unit head Anne-Laure de Chammard said that Siemens needed government guarantees and support to ramp up production. Bank financing had been “challenging”.

The opening price of Siemens Energy in fall 2020 was 22.01 euros, but three years later it was trading in single digits.

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After my posting last summer on Guyana we’ve had a few follow-up discussions on investment implications. At the time it seemed the momentum behind the debasement trade and AI was unstoppable, but news of the last few weeks (and a big announcement expected later this week) is pointing to a great opportunity.

Hope this is an interesting read! If you haven’t signed up yet, please consider a subscription – I think it’s really important to develop a long-term perspective. Many thanks!

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I wrote my first corporate research report on Exxon in the early 1990s as a student. Our corporate finance course instructor was a tough nut, an ex-Wall Street banker but with full Wall Street attitude. Roll calls at the beginning of every class. Five minutes late into class got you a no-show booking. Two bookings, she dropped you from the course.

Mind you, this was the time before the Internet. There were no fancy dotcoms around, no 10x engineers, no zero-to-one business models. The craziest thing ever to happen was the RJR Nabisco takeover by LBO firm Kohlberg Kravis Roberts1. And secondly, research meant actually calling up the investor relations department to ask for hardcopies of annual reports and financial filings, because neither e-mail nor EDGAR databases existed.

From that perspective, writing a research report on Exxon as my term paper wasn’t that bad. I thought there was a special angle to it – just a few years before, supertanker Exxon Valdez had run aground in the Prince Williams Sound in Alaska, which resulted in the largest oil spill ever by that time (it was pushed from the top spot by Deepwater Horizon in 2010). So, on top of a share valuation, I was looking for any meaningful financial liabilities from the accident (Spoiler: there were basically none).

In March 2023, the S&P500 was in the middle of a large market correction, down 17% from the peak of December 2021. The Federal Reserve had started an aggressive rate hike cycle, and bond yields exploded from around 1.5% (10-year UST) to 4%, the highest in 15 years – a nightmare scenario for equity markets whose valuations were based on “new normal”, ultra-low discount rates. After a disastrous 2022, investors braced for worse to come.

But on March 23, 2023, the world changed. Research lab OpenAI released Chatgpt-4, and what was a tool for tech afficionados before reached public consciousness. Valuations for AI-related companies exploded and drove the S&P500 from below 3,900 points to 7,000 in January 2026. You know the companies which drove the crazy spike, the Magnificent Seven. Consider Nvidia, the world’s largest company by market cap at around $4.7 trillions. Sure, Nvidia is enormously profitable – net income consistently exceeds 50% of revenues (55% in fiscal Q3 2026, i.e. calendar Q3 2025), and the company grows at an incredible rate. Paradoxically, it earns way more money than it can meaningfully use, hence the idea to lend money to its customers to buy even more Grace-Blackwell superchips. But how much can they sell in the end? If Nvidia kept its profitability forever (not going to happen), and paid out 70% of net income as dividends, it would still have to capture 10% of total capital expenditures in the U.S. economy to claim a $4.7 trillion valuation. I doubt they can do it. There’s still a lot of money going into passive/ index-replicating investments and FOMO behavior, but sooner or later realities will catch up with tech valuations.

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January has been a tough month for the EU. If you’re thinking Greenland – sure, that was a major surprise. But there’s an even bigger problem as European unity on core policies is collapsing with its leadership. Deep rifts are opening, and Europe’s policy hawks look weaker than ever before.

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In March 2015, the German population woke up to unpleasant news about the combat readiness of its armed forces, the Bundeswehr. It turned out that the workhorse rifle of the Bundeswehr, Heckler & Koch’s G36 assault rifle, malfunctioned quickly as the barrel heated up under repeat fire. The G36 was supposed to become a leading infantry rifle, feared globally for efficiency and accuracy. It was built with lightweight polymer materials, taking its cues from Austria’s futuristic Glock AUG rifle and famous pistols. The G36 also featured a weight-reduced barrel. But in combination, shooting accuracy dropped dramatically in real-world battlefield environments like Afghanistan, when consecutive magazines were emptied – from 90% accuracy to as low as 7% as the thinned barrel deformed under heat.

The German minister of defense, Ursula von der Leyen, quickly blamed the manufacturer and ordered a legal review for potential compensation and repairs of 167,000 rifles. Heckler & Koch vehemently denied design flaws and pointed to contract specifications. Performance under repeat fire hadn’t been specified anywhere, and German courts rejected the minister’s attempts to claw back money. German service personnel were left with the advice to fire only sparingly, and to keep the rifles out of direct sun exposure, please.

(Better take another gun next time, Ethan. Tom Cruise firing the G36 during the famous bridge escape scene in Mission Impossible: 3)

In the same year, von der Leyen ordered a renovation of the Gorch Fock, a majestic tall ship still in service for training at the German Navy. Initially, expenses were estimated at just below 10 million euros, but they soon spiraled out of control, reaching 135 million euros by 2019. A general review of weapons system readiness in 2017 revealed that only 38 systems out of 97 delivered were functioning, a devastating performance assessment for the responsible minister. When it turned out that consulting services for the defense department worth hundreds of millions of euros had been handed out without appropriate tender processes, von der Leyen’s career was finally over. She had taken office as defense minister in 2013 as the heir apparent of Angela Merkel, destined to become Germany’s next Chancellor. By 2019 it was clear she was politically untenable in Germany.

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This is the first installment, and we plan to have these conversations more often. Let us know what you think. Enjoy!

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Last Sunday I posted a quick analysis about Europe’s dependency on LNG imports from the U.S. The data demonstrated the huge leverage the U.S. had over Europe in any negotiations about Greenland. Without U.S. deliveries, Europe would run out of gas in April.

The note was very well received and went viral – I’ve never received that kind of engagement before. Thanks so much!

But on a second, more granular look, it turns out that for some countries, including Europe’s largest economy, the status is even worse. Germany is approaching critical levels already without any disruption from the U.S.

You’ve probably heard about mismanagement of energy resources before – but here are the receipts. I’m sure you haven’t seen those before. Hope this is an interesting read for you!

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As Donald Trump expressed his determination to gain control over Greenland, one way or the other, European politicians went through their options to oppose his claim. Selling Europe’s holdings of U.S. treasury bonds, which in total are quite significant? Cutting off access to ASML’s lithography machines, crucial for the most advanced microchips for AI development? Invoke the EU’s “anti-coercion instrument”, a law which was passed only in late 2023 and which provides the legal basis for trade restrictions? What kind of damage would each of the options potentially inflict upon the U.S., and how long would it take them to have an impact?

As it turns out, however, Europe has developed a weak spot – a dependency on U.S. energy imports. After the EU cut itself off from Russian gas, two countries filled the gap, Norway and the U.S., both of them sending about 200 TWh of gas energy each quarter, in combination almost 60% of total gas imports.

The EU passed a law few just a few weeks ago to terminate the remaining 85 TWh/ quarter which Russia delivers after 2027, and “someone” will have to replace those volumes on top of recent reallocations. Complicating matters, Europe’s gas inventories are unusually low. Should any of the two large suppliers drop out, e.g. due to disagreements about Greenland, the EU will run out of gas by April.

Unfortunately, geopolitical escalation isn’t even needed. Once again it’s Germany which has navigated itself into a corner. If standard winter weather continues, the country will have to ration gas in the next few weeks.

Running out of gas

Gas demand is highly cyclical with strong peaks in winter due to heating and low renewables production, but supply is more or less continuous throughout the year via LNG tankers and pipelines. In the slow months in summer, excess natural gas is compressed and injected into underground formations (UGS/ underground gas storage) – typically repurposed former hydrogen reservoirs or salt caverns (mainly in Germany and the Netherlands) which are man-made. Former hydrogen reservoirs offer large capacities but moderate withdrawal rates. The flow of gas follows physics – gas flows from high-pressure storage to lower-pressure pipelines, which has important implications. The system runs on a large layer of cushion gas, which cannot be extracted because system pressure drops below operating levels once cushion is reached. Overall, storage has an energy-equivalent capacity of just above 1,100 TWh of electricity.

LNG terminals form the second leg for gas storage and take receipt of deliveries from carriers. Storage is only short-term (days, maybe weeks), and they are viewed rather as part of the delivery infrastructure (taking in large bulks in short time and feeding into the UGS system) than storage infrastructure.

Utilities use the summer months to refill storages. Peak inventories are typically reached in October, before the net drain from the cold season begins. However in 2025, fill levels were much lower than in previous years, especially at large consumers like the Netherlands or Germany.

(Storage levels dropping at seasonal peaks. Sources: THE ECONOLOG/ Gas Inventories Europe)

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When the Federal Reserve and other central banks around the world launched Quantitative Easing in 2008, many economists believed it was just a temporary operation to address the Global Financial Crisis. But QE remained in place – in fact, unconventional policy responses to economic problems have proliferated, in particular in recent years. There’s enough evidence now that the age of monetary restraint and fiscal prudence is over, and we’ve entered a new age of unorthodox policies in central banking, public finances, and politics, with significant implications for financial markets.

High-concept paper – I think it’s time to call out the new environment for what it is. Hope this is a useful framework for thinking about investments. Let me know what you think!

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A little more than one year ago, I posted an analysis of U.S. stocks valuations. I ran my numbers using the Wilshire-5000 market index and compared it to GDP, a ratio also known as the “Buffet Indicator”, as Warren Buffet once said it was a favorite tool to assess the health of the market.

In December 2024, the outcome wasn’t favorable. The Buffet Indicator was at record levels, and about two standard deviations above the long-term average. All in all, clear signals that the overall stock market was overvalued by historical comparison and by historical dimensions.

But I added another element to the analysis – the level of balance sheet securities held by the U.S. Federal Reserve. The increase in balance sheet assets traces the expansion of market valuation multiples nicely – the more money arrived in markets from quantitative easing, the more money was put into stock markets.

The year 2008 represented a structural break in the way central banks manage money supply. Before 2008, central banks made money scarce. They supplied just enough of it to keep the economy working. Banks competed for funding, and the federal funds rate was a market-clearing equilibrium rate.

But quantitative easing created excess supply of money. Central banks intended this new regime to eliminate, once and for all, scenarios in which liquidity ran out in the banking system, launching systemic crises. Economists believed this new “ample reserves” regime was temporary, just a response to the GFC and later to the pandemic. But ample reserves are here to stay. This is a structurally new feature of financial markets, still little recognized. In the quantity theory of money, it acts as a continuing, bottom-up force on prices to rise.

Quantitative easing/ ample reserves have led to asset price inflation (record stock market levels, bond prices falling to almost zero (below zero in markets as Japan and Germany), housing becoming unaffordable) and to real-goods inflation in recent years – a fundamental trend that is here to stay. You may remember I’ve written about that before. What’s new is the context – QE is just one element in a much broader transition.

Genius?

The U.S. government launched a program which will replicate the impact of QE. In July 2025, President Trump signed off on the GENIUS act (Guiding and Establishing National Innovation for U.S. Stablecoins). The act requires issuers of stablecoins (cryptocurrency assets which are pegged to the U.S. dollar at a fixed exchange rate) to maintain collateral in high-quality assets like U.S. treasury bills or cash dollars. On the face of it, the GENIUS act improves the safety of stablecoins. But in reality, the act established a whole range of mini-central banks: on the asset side of their balance sheets, treasury bills; on the liability side, currency in circulation (stablecoins), exactly like the Federal Reserve. As stablecoins gain in popularity, the GENIUS act creates a new form of money supply which can become quite substantial in quantity, but which is outside control of the Federal Reserve. There is a lot of talk currently about the independence of the Fed. But with the GENIUS act, the U.S. government has effectively created its own central banking system. The more stablecoins in circulation, the higher the demand for collateral i.e. treasury bills.

The GENIUS act is quantitative easing in disguise and will have the same impact – a core trend of inflating money supply, raising financial asset prices and real-world prices.

Post-orthodox fiscal policies

In 2010, economists Carmen Reinhart and Kenneth Rogoff published “Growth in a Time of Debt”, a hugely influential paper about the negative impact of excessive debt on economic growth. Empirical data showed, the paper pointed out, that once public debt exceeded a threshold of 90%, economic growth slowed down dramatically. The Reinhart/ Rogoff findings were a key motivation for fiscal consolidation policies in the EU during the Eurozone financial crises in the early 2010s.

A review of the Reinhart/ Rogoff data in 2013 however found some pretty awkward mistakes in their excel-sheet, e.g. formulas leaving out some data. After correcting the math, the sharp drop-off at the 90% threshold vanished. But Reinhart/ Rogoff argued the broader point still held – high debt is associated with low growth.

Fast forward 10 years to “Modern Monetary Theory”. In 2020, Stephanie Kelton published “The Deficit Myth”, in which she argued there was no conceivable debt limit at all – countries which run their own currencies could always print enough money to service their debt. The only practical limit was inflation. Kelton’s book was received with great enthusiasm by fiscal doves who argued expanding deficits actually helped economies by stimulating aggregate demand, setting up virtuous circles1. Metric like debt-to-GDP don’t matter any longer in the MMT world.

In the ideological battle, Reinhart/ Rogoff represented the traditional view of fiscal austerity. Kelton represents the other end of the spectrum in a post-orthodox era.

In reality however, many industrial countries have long crossed the 90% Reinhart/ Rogoff threshold, and their fiscal position is guaranteed to get much worse. Nato member states signed off the largest increase in defense spending ever in July 2025 at the meeting in The Hague, raising spending to 5% of GDP by 2035 from 2% (at best) – adding at least 3 percentage points to deficits/ GDP (and therefore to total debt) annually.

The population pyramid is working against budget consolidation as well. The working population pool is shrinking most of the developed world, driving up dependency ratios (retired people depending on working people in pay-as-you-go systems) much more quickly than expected in actuarial projections. Social security payments must rise in that scenario but will never decline.

(Sources: The World Bank, Statista)

It is a mathematical certainty that government debt is rising to unsustainable levels.

As an investor, I think it’s important to realize we have entered the era of post-orthodoxy. Established, proven economic policies do not apply any longer. The era of orthodoxy began more than 40 years ago, when Paul Volcker, having taken over at the Federal Reserve in 1979, launched his fight against inflation. That era brought a strong decline in inflation and interest rates (from peaks of around 20% in 1980 to basically 0% in the late 2010s), and outsized returns in bond investing, especially on a risk-adjusted basis. That secular cycle is over.

We are now entering a period of persistent forces working towards monetary debasement. Monetary policy has fallen apart in the ample-reserves regime, and we’re heading towards an even bigger risk of monetary fragmentation due to stablecoins. At the same time, government finances are becoming unsustainable. The only way governments can deal with them is via tolerating higher inflation. This is a historical confluence of risks. Even if some of them never materialize, other will. Things that can go wrong will go wrong.

Strategic guardrails for an asset allocation

If you believe in that scenario (and I think there are strong reasons to do so), then the following forces apply in the long run -

• Expect fixed income investments to underperform. Even if headline inflation numbers (if you believe in them anyway) look tame, they do not reflect the full loss of purchasing power. Consider, for example, the enormous increase in housing prices and affordability crisis. A ten-year bond will pay back 100% in ten years, but the price level may have risen to 150%.

• Stock valuations look high in an orthodox view, but not in a post-orthodox world. Stocks were driven up by quantitative easing, and there is no sign this is being reversed – on the contrary. As bank reserves declined last fall, the Federal Reserve launched “reserve management purchases”, targeting monthly purchases of $40 billions of Treasury bills until at least April 2026, thereby injecting $40 billion of new liquidity. In parallel, Stablecoins, which essentially operate as shadow-QEs, grew by about $100 billion in 2025 alone. Treasury officials think a volume of $2 trillion is plausible by 2030 – that’s more debt monetization than in any of the first three rounds of QE (only QE4 was larger, launched in response to the pandemic). Overall, the key forces which drove up the market are still in place. Waiting for a stock market correction (or timing a correction) isn’t worth it from that perspective.

• Real assets whose supply cannot be manipulated will outperform as well. For individual investors, they include gold, silver, and (to a much lesser degree) real estate (which I don’t think belongs in the financial investment category). I think direct exposure make most sense for them – no funds, no derivative investments (CFDs, ETCs, etc).

I understand this is a grand hypothesis which may be hard to swallow. But I honestly believe we’re living in a very unique environment in which established policies, central to our economies, are thrown overboard in a haphazard way.

Happy to discuss – let me know your thoughts!

All the best,

John

Important Notice

The Econolog is a financial newsletter to share analysis and comments on financial markets. The information contained on this website should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Data provided in these pages are obtained from sources believed to be reliable, but not guaranteed. Investing in financial securities is risky. Please consult with your investment adviser to make informed decisions.

I rescheduled my posting line to address the surprise intervention of the U.S. in Venezuela. As I noted in my outlook last week, turbulence and volatility create opportunities – and the outlook for Venezuela has changed dramatically. After decades of headwinds, the country now has U.S. support. Hedge funds jumped on the opportunity. But the market’s enthusiasm may be premature – the prospect for Venezuela’s oil industry is much less robust than headline numbers suggest.

Again, lots of analysis, condensed in a chart which I think will make some people reconsider their assessment. Hope this is helpful – please let me know your thoughts, and drop me a ‘like’! Many thanks! And now on to …

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Venezuela, once a prosperous South American nation, became one of the worst managed countries in recent decades. Under presidents Hugo Chavez and Nicolás Maduro, living standards collapsed in every conceivable domain. GPD has shrunk by 70% over the last years, inflating the debt-to-GDP ratio to around 200%. The U.S. placed sanctions on the country. Venezuela defaulted on its debt, and government bonds traded in the 30-cent range on the dollar. The U.S. intervention however put Venezuela into the focus of geopolitical interests. After the intervention on January 3^rd, bond prices jumped to the low 40s, up around 30%.

As Venezuela is moved into U.S. conservatorship, is this another secular investment opportunity? Greece was collapsing in 2015 but suddenly moved into the center of geopolitical interests. When the IMF and the EU bailed out Greece, it became Europe’s best-performing bond market.

Or is it going to be an Iraq-style fiasco? Similarly to Venezuela today, Iraq was touted to be the most oil-rich country in the world when the U.S. invaded it in 2003. Iraq’s fabled oil fields Majnoon, West Qurna, and North Rumaila were the world’s only remaining elephant fields left with combined reserve estimates of up to 70 billion barrels. Ironically, the collapse of Iraq became a key factor in the resurgence of Greece.

As it turns out, the hedge fund bet is very instructive when analyzing the outlook for Venezuela’s oil industry.

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Dear readers,

Reaching out to you to wish you a happy and prosperous New Year! Many thanks for your interest and continued support – it has been a pleasure and privilege building this relationship with you, and I am very grateful for it.

Here is a quick outlook on what I think will be three key drivers of global events this year, and which I will investigate in a series of papers:

1. The end of the Ukraine War, and Russian rapprochement. The momentum for peace, both internally in Ukraine and externally, points to an end of the war in the near term and the normalization of global relations with Russia. Energy trade patterns will shift again, and even the EU might have to reconsider its absurd ban of Russian gas as its economies are suffocating.

2. Financial markets are accelerating their monumental pivot. The 40-year period of disinflation and outsized returns from fixed income investments is long over, but we’re now in an era of monetary debasement. Last year, one of my focus points was on central banking to analyze the foundations of ample reserve regimes. This year I will shift gears with asset allocation strategies and more specific and actionable investment views.

3. Europe’s industrial transition has arrived at a breaking point. Ever more employers’ associations and manufacturers’ associations are raising an alarm over declining order books, competitive forces, and hostile economic conditions. The EU has had to cancel key provisions of its ambitious regulations in 2025, but economic momentum is still dropping like a rock. Time is running out to adjust policies, and we’ll keep an eye on progress – or lack thereof. Kicking the can down the road won’t work for the EU because it is approaching an existential crisis, maybe an ELE.

I believe we are facing an exceptionally interesting year – change, ambiguity, and volatility create opportunities. I look forward to sharing my analysis and hearing your views. Please stay in touch, and don’t ever hesitate to reach out directly with questions and feedback – this community was made to grow together.

Thanks so much again,

And all the best,

John

Something remarkable is happening in Europe. As the year ends, EU countries suddenly realize how the tide has shifted – and they are rebalancing their allegiances. I think this has some interesting implications for the new year. Call me philosophical, but this is a good moment for musings about 2026.

In the early hours of Friday, December 19, exhausted leaders of EU member states and the EU Commission emerged from grueling discussions over 15 hours. They presented a loan proposal for Ukraine, a financial package worth EUR 90 billion backed by future EU budgets, which was supposed to keep Ukraine’s defense in the war with Russia afloat.

That outcome was a huge disappointment - just the fallback solution, presented to EU member states as an undesirable alternative to make the preferred outcome more palatable: using Russian assets as collateral for an Ukraine loan. But those Russian assets are held at global custodian Euroclear, based in Belgium, and the Belgian prime minister demanded guarantees from his fellow EU representatives to bail out Belgium should Russia raise any legal claims against the confiscation of its assets.

The masterplan was sponsored by a clique of EU leaders around Ursula von der Leyen, mainly including Commission VP Kaja Kallas, German chancellor Friedrich Merz, and French President Emmanuel Macron. The Coalition of the Willing was built on a single, overarching dogma: Russia must lose the war, whatever it takes. No collateral damage was large enough, no sacrifice too large to derail their mission. A few weeks ago, Merz told western TV audiences, tears in his eyes and tremble in his voice, how he’d read Winston Churchill’s biography and his comments on failed appeasement politics right before World War II to drive home, once again, the need to defeat Russia militarily.

So it was Merz who flew to Brussels, a few days before the fateful European Council meeting on December 18, to talk Belgian Prime Minister Bart De Wever into an agreement to the EU plan, assisted by von der Leyen.

They failed. Belgium’s De Wever held the line. Italy’s Giorgia Meloni declined to provide guarantees. And in a devastating blow to Merz, France’s Macron declined as well.

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The festive season is arriving in many parts of the world. I would like to leave you with the inspiring story of a Founding Father of the United States, and the unexpected but profound influence of his ideals in today’s politics. Hope this is an interesting read, and helpful for your own thinking and discussions.

All the best – and happy holidays!

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“[A] genius—the only one of the Founding Fathers fully entitled to that accolade—and he had the elusive, indefinable characteristics of genius” – Historian Paul Johnson about Alexander Hamilton. A History of the American People, 1997.

Alexander Hamilton was a student at King’s College (today: Columbia University) when the Revolutionary War broke out in 1775. Hamilton enlisted in a volunteer militia company, the Corsicans, which soon launched a successful raid for British cannons at the Battery, the southern tip of Manhattan. The revolutionary government commissioned Hamilton to raise additional troops for a new unit built on the seized cannons, the New York Provincial Company of Artillery.

Hamilton’s unit provided important tactical relief to the Continental Army during early battles in New York, serving as a rearguard during disastrous retreats of the army at the battles of Harlem Heights, White Plains, and across New Jersey. Senior officers, even including General George Washington, commander of the Continental Army, took notice. At the battles of Trenton and Princeton, Hamilton’s artillery support contributed to crucial victories which turned the tide in the Revolutionary War after a string of defeats.

In early 1777, George Washington appointed Hamilton as his aide-de-camp (secretary) in the rank of lieutenant colonel, which placed him in Washington’s inner circle for four years.

(George Washington, Alexander Hamilton. Source: National Heritage Museum, Lexington, MA)

Hamilton however remained convinced his true calling was on the battlefield, not in a staff position. Washington finally agreed and conferred a special assignment on him.

In the summer of 1781, the momentum of the war was decidedly against the British forces, but British Lieutenant General Charles Cornwallis was building a stronghold at Yorktown, Virginia. Yorktown was a crucial strategic asset. As a deep-water port, it facilitated British reinforcements and resupply and served as a hub to subdue the southern British colonies.

The strategic value of Yorktown turned into a trap when a British fleet, supposed to relief Cornwallis, was beaten at the Battle of the Chesapeake by a French Navy force, allies to the Continental Army. American and French forces surrounded Yorktown but were facing two fortified defense outposts of the British, Redoubt 9 and Redoubt 10. On the evening of October 14, 1781, French infantry quietly advanced to Redoubt 9, and a battalion of American infantry under the lead of Hamilton to Redoubt 10. Both positions were taken over quickly in the commando operations. The Continental Army moved artillery into the redoubts and fired into Yorktown from three directions. Cornwallis surrendered three days later. Yorktown was the final large battle of the Revolutionary War and sealed the defeat of the British.

(Source: The Storming of Redoubt No. 10, Eugène Lami)

After the war, Hamilton left the Army. The experiences during the war, and the personal qualities he demonstrated, led him to a political career and an even larger influence on the development of the nation – but ultimately also to his premature death.

British free-trade system …

After the defeat against former colonies, the British did what all European nations did at the time – engage in endless wars and revolutions on the European continent. When the French Revolutionary Wars broke out, the Royal Navy brought a young officer who had been unemployed after the American War back into service, Horatio Nelson. Nelson fought in several naval battles during the Napoleonic Wars and developed a reputation for his amazing grasp of battlefield dynamics and ingenious tactical responses, but also for personal perseverance. He lost sight in one eye on Corsica, lost his right arm at Tenerife, and reportedly suffered from sea sickness most of his life. In 1805, he was assigned to enforce the blockade of Spanish harbor Cadiz, where a combined Spanish-French naval force was preparing to cover an invasion of Britain. When the fleet left, Nelson intercepted and defeated it in a cunning maneuver at the Battle of Trafalgar. It cemented Nelson’s reputation as one of the greatest admirals in history, if not the greatest. In the late hours of the battle, a marksman shot Nelson when the French Redoutable passed the HMS Victory at close range. Nelson died a few hours later at age 47.

The victory at Trafalgar made England the undisputed leading naval power in the world, and England used it to enforce its economic ideology: radical free trade, no tariffs. Cost advantages dictate the flow of resources, the global division of labor, and the development of manufacturing (conveniently, Britain was the first industrializing country). The role of the state was minimal. Trade was financed by gold, and the City of London became the leading global financier. Economists Adam Smith and David Ricardo provided solid theoretical underpinnings with their famous trade theories.

But already in the early days of expanding global free trade, large imbalances started showing up. Imperial Britain developed an insatiable thirst for Chinese tea, and imports increased exponentially. Chinese traders accepted silver only as payment, resulting in a continuous drain of silver bullion from Europe into China. To offset the deficit, the British East India Company began to export opium, grown in India, into China, setting off an addiction pandemic and ultimately the Opium Wars with China.

… versus the American national system of political economy

America however developed a very different approach to economic development in those years under the intellectual leadership of Alexander Hamilton. I have no doubt his convictions were shaped by his experiences during the Revolutionary War. The American war effort almost fell apart right before the decisive Battle of Yorktown, when large parts of the Continental Army declined to march to Virginia. They demanded pay in hard currency, not in the Army’s paper money which was losing value quickly. In the end, the allied French commander, Count de Rochambeau, had to jump in and paid 20,000 dollars in gold coins, half his war chest.

Hamilton realized the country needed a strong, well-financed, central government that had the power to raise money for large undertakings – like wars. He was appointed by George Washington as the first Secretary of the Treasury and set up a unified national debt office which consolidated revolutionary war debts of the states. In parallel, he initiated the creation of the First Bank of the United States, a public-private joint venture, if you will, to stabilize the currency and to manage government funds. Again, this was likely driven by his experience during the war, when paper money became worthless.

In his Report on Manufactures, issued in 1791, Hamilton laid out his vision for industrial policy. It was very different from the British laissez-faire approach, under which resources organized themselves for the most efficient use, benefitting everyone. America was a young, building country, which needed to protect and nurture its developing industries. Hamilton therefore advocated for import tariffs to keep foreign competition at bay, plus domestic subsidies to foster local production – a policy which is called “infant industry protection” today and which was supposed to reduce reliance on foreign imports and build domestic self-sufficiency. In his system, manufacturing is the foundation of wealth and military power.

In just a few years, Hamilton set up the institutions of the U.S. financial system and the country’s industrial policy, which turned out very successful: credit worthiness improved, the currency was stabilized, and it laid the foundations for a capitalist economy.

Battle of ideologies

Ideologically however it was in opposition to the British system. Britain launched globalist liberalism under a laissez-faire government and backed by London’s gold reserves, a tradition which lasted as long as the British Empire.

Hamilton’s model was most influential in the U.S. from the time under President Abraham Lincoln until the New Deal in the 1940s. It was copied by other industrializing nations – Germany, Japan, later South Korea, and most recently China.

In the ideological battle, the British Free-Trade System in the end got the upper hand in the wake of World War II. The world reorganized under the principle of free trade, supervised by new multinational institutions like the World Bank and the International Monetary Fund (IMF), all of it in a ”rules-based order”. The underpinning was delivered by Karl Popper and his hugely influential work “The Open Society and its Enemies”, in which he identified national extremism as the key reason for World War II and radical openness at the key antidote1. Globalism and Neoliberalism gained strong momentum in particular in the 1980s in Britain under Margaret Thatcher and Ronald Reagan in the U.S. (even Neocons like George Bush followed neoliberal economic policies).

This is the backdrop for a huge policy pivot in the U.S. under Donald Trump - a historic turnaround whose elements and goals are taken right out of Alexander Hamilton’s playbook: tariffs, national economic independence, building domestic industry, activist developmental function of the state.

The effort is driven by another large imbalance which had been building in hiding but which had escalated in recent years – incidentally once again predominantly with China: enormous trade deficits, the massive decline of US-domestic manufacturing, dependency on other countries, weak protection of intellectual property rights - a combination of weaknesses potentially inviting geopolitical rivals to exploit them. Overall, Trump’s program therefore is a return to Hamilton’s ideal and the American National System of political economy. It is not a contemporary aberration, but a restoration of a historical regime which was in place for one and a half centuries, and it is supposed to address the imbalances which had built under the British laissez-faire approach.

In July 1804, Aaron Burr, a political opponent, challenged Hamilton to a duel with pistols. Burr had lost against Thomas Jefferson in the 1800 presidential election and subsequently also in gubernatorial elections of New York, and he attributed both defeats to Hamilton’s influence. Hamilton accepted, bound by a code of honor and integrity. Seconds rowed the men across the Hudson River to a New Jersey cove in the early morning of July 11. Alexander Hamilton received a fatal shot, paralyzing him. He died one day later, aged 47 (the same as Viscount Horatio Nelson)2.