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Chapter 1: What is the main topic discussed in this episode?
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Welcome to Profiteer Markets.
I'm Ed Elson. It is June 11th. Let's check in on yesterday's market vitals. The major indices all tumbled more than 1.5% after President Trump expressed frustration that negotiations with Iran were taking too long. The S&P 500 hit a five-week low. And then, after hours, the U.S. began striking multiple targets in Iran, at which point the price of Brent crude climbed.
Meanwhile, the yield on 10-year treasuries was mostly stable despite the hottest inflation report in three years. More on that later. Okay, what else is happening? It is a monumental week for the AI industry. SpaceX is expected to price tonight and will begin trading on the Nasdaq tomorrow in what will be the largest IPO of all time.
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Chapter 2: How is investor sentiment towards AI shifting?
Well, I do expect the president to come to terms with the Iranians and open up the strait and get oil production ramping up back up again and oil prices moving south again. So I think that's the most likely scenario. But as you were alluding to, there's a gazillion different scenarios here in Iran. Almost all of them are worse than the baseline, you know, inflation being higher for longer.
The one thing I do think that we need to watch, though, to answer your question is inflation expectations. I mean, if expectations continue to for inflation continue to rise, particularly bond market expectations, then the risk is that this inflation becomes more persistent, more entrenched and That obviously has big implications for what the Fed's going to do.
So, so far, the inflation expectations, they're on the high side of where I think the Fed would feel comfortable, but they haven't kind of breached up to the upside. But that's something to watch to answer your question.
Just to game theory this out, like, let's imagine a world where Trump does not figure out how to negotiate with Iran, the straight remains closed or the situation persists as it is. It's hard to tell whether it's closed or open or who's blockading what. Point is, it's not going great over there. That's all we know.
If it remains as is, call it for the next six, nine, 12 months, does the number get worse and worse and worse? Or do you expect that it will plateau at some point?
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Chapter 3: What does the SpaceX IPO mean for the market?
No, that's a pretty ugly scenario because we're running out of inventories. I mean, global inventories of oil have been being significantly drawn down. I think you have to go back to the early 80s to find inventories as low as they are today. And compared to the size of the economy, you have to go back even further. So there's just no inventory.
And if we don't see a resolution to the war, if the strait doesn't open, if production doesn't pick up, those inventories are going to get to a place where we're going to start seeing actual shortages, physical shortages. Maybe not in the United States because we produce a lot of oil. We produce as much oil as we consume, but in other parts of the world.
And I think at that point, traders and everyone else would come to the conclusion that, well, this isn't going to come to a quick end. You know, we got a problem here. We need much higher oil prices to equate demand with the reduced supply. And that means much higher prices and that means much higher inflation.
And that's a scenario where you do get inflation expectations, you know, breaching the upper limits of what the Fed would feel comfortable with. And that's a pretty dark scenario. But clearly, the scenario with a meaningful probability attached to it.
In other words, it sounds like almost all of this rests on Trump's ability to negotiate a deal with Iran. It sounds like you are somewhat confident that he will pull that off in the near to medium term. I guess my question is, why do you feel that way?
Well, you know, the president, you know, whatever you think of him, the one thing you can say is that, you know, he if things aren't working out in the way he wants them to help pivot 180 degrees, declare victory and move on. At least that's been what he's done so far. So I'm applying the same kind of logic to my thinking around what he's going to do here.
He's desperately obviously trying to figure out a way to wind this thing down, declare victory and move on. So hopefully he finds that sooner rather than later. Otherwise, We're going to be in a boatload of hurt. And the scenario where he doesn't come to terms in the next few weeks, next month or so, that's a recession scenario, a stagflation recession scenario.
I personally don't feel so optimistic about it, but part of it is some of the things that he said about he's not worried about it. And then he also said this thing about inflation yesterday. We have a clip of what he said. He was asked about this inflation report. I'm just going to play this clip, and I'd love to get your reactions.
No, I love it. The numbers were great. You know what I really love? I love the inflation. You know why? Because as soon as this war is over, you know, I can say it now. Something you didn't know. Do you know we've been taking out millions of barrels of oil? Nobody knows it. You know who doesn't know about it? Iran, until right now.
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