GM. This is Milk Road, the crypto newsletter that gives you signal in a sea of noise.
It’s Thursday. You know what that means:
Tomas is giving us a breakdown on everything we need to know about the current macro environment!
Here’s what we’ve got for you today:
- ✍️ What’s the latest with the Iran war?
- 🎙️ The Milk Road Show: The Shift From Crypto Cycles to Structural Growth.
- 🍪 How AI will change crypto.
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WHAT’S THE LATEST WITH THE IRAN WAR? 🤛
I covered the latest on the war in detail in today’s macro newsletter - but here’s the short story…
Beneath a mountain of headlines, there now appears to be “negotiations of a sort” happening between the two sides of the conflict, via third-party mediators.
America proposed a “15-point plan” for a ceasefire. Iranian officials then appeared to publicly reject that plan and proposed a “5-point plan” of their own.
Neither side appears to be close to agreeing to a deal at this point in time.
Meanwhile, thousands of elite U.S. troops are en route to the Middle East.
It looks likely that the U.S. might have to initiate a ground invasion of the strategically important Kharg Island if it wants to attempt to reopen the vital Strait of Hormuz shipping route by force.
Iranian officials are not very happy with this and have vowed significant escalations if the U.S. attempts a ground invasion.
Meanwhile, the Strait of Hormuz remains closed, with hundreds of tankers clogged up and a huge chunk of the world’s energy supply still frozen.
And this is the most important thing for markets.
What does it all mean for asset markets?
Crude oil - the most important market in the world right now - continues to edge slowly upwards. Brent crude oil dipped lower earlier this week as hopes of a de-escalation were raised.
But it’s now pushing higher again, back into the “stagflation zone”.
We haven’t yet hit the “danger zone” at any point ($120+) - which is where commentary would likely shift from “serious macro drag” to “heightened global recession fears”.
Unfortunately, as long as the Strait of Hormuz remains closed, it’s likely that crude oil and other energy prices will continue to creep up over time. With a massive gap in the global oil supply, growing larger with every day that passes, there’s simply not enough oil for everyone.
Trump administration officials are actively examining what a potential spike in oil prices as high as $200 a barrel would mean for the economy, according to Bloomberg.
Meanwhile, the S&P 500 continues to trade in almost perfect inverse lockstep with oil:
- Oil up = stocks down.
- Oil down = stocks up.
Since the conflict began, risk asset markets have settled into a bit of a rhythm.
A “stair-step down” week-by-week.
For equities, more clearly, but also Bitcoin and crypto too, that rhythm has generally been:
- A gap lower to start the week.
- “Dip buyers” emerge, often resulting in notable gains on Monday/Tuesday.
- Pessimism creeps back in as the week progresses, before a broad-based de-risking into the weekend.
This week, though, seems like it might be a little different….
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WHAT’S THE LATEST WITH THE IRAN WAR? (P2) 🤛
The market hasn’t faded as much as in previous weeks, and equities have largely treaded water (so far at least - at the time of writing) after the Monday pop.
This change in dynamic might suggest that, despite all the noise, investors are focusing on the key signal that this week’s developments have sent.
At face value, the Trump team seems more open to finding an “off-ramp” and is attempting to find a way of de-escalating the conflict.
That said, we still appear to be some way off a ceasefire, and kinetic action is continuing in the Middle East.
All the while, the Strait of Hormuz is still essentially impassable, and the impact of the energy price shock continues to mount.
In a note, JP Morgan’s market intel desk wrote:
“The thinking this week is that escalation is what will drive markets lower from here:
- Attacks on energy infrastructure, especially Saudi oil production and refining.
- U.S. boots on the ground or an attempt to use military force to reopen the Strait.
- U.S./Israel targeting civilian infrastructure in Iran.
- Any attacks on water supply in the region.
“Barring escalation, we expect markets to chop sideways, but it does seem more likely that we will get a decisive move shortly, either steps toward a ceasefire or another wave of escalation.”
Some people have been comparing the current risk-off environment to the “tariff tantrum” correction in April 2025.
But this current environment appears to be different from April 2025, from a retail investor perspective (non-professional investors).
Back then, retail traders jumped into the market and “bought the dip” amid the tariff chaos, correctly anticipating the Trump tariff U-turn and helping to form the rapid “V-bottom” in risk assets in early April.
However, this time, retail investor flows are waning, according to JP Morgan.
Retail dollars invested shrank 15% week-over-week - and have dropped 43% since the start of the conflict.
So, what happens next?
On the geopolitical front, nobody knows. I’m certainly not going to pretend that I do.
I think there’s still a lot of hope priced into both energy markets and risk asset markets.
That might be correctly placed hope - but it’s still hope nonetheless.
If the Strait of Hormuz remains closed for a prolonged period, we’re heading for a serious global growth slowdown/recession.
This is clear.
That is the path we are currently on.
Right now, markets are pricing in a high probability that this path changes, and soon.
This may be true - I don’t know - I have as much insight as anybody else on what will happen next with the war.
There are big incentives on both sides to wrap this war up quickly.
But the growing risk here is a looming “tipping point” when the market starts to lose hope of an imminent resolution.
There’s only so much “verbal jawboning” that can be done by U.S. officials before the market realizes this mess might not be ending soon.
And the longer the Strait remains closed, the more widespread and lasting the global economic damage will become.
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