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Chapter 1: How is the oil blockade affecting market trends?
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Megan Rapinoe here. This week on A Touch More, we're bringing you our live show in Phoenix with WNBA four-time champion Chelsea Gray and the Naismith Coach of the Year Shea Ralph. Together, we talk about the NCAA semifinals, the crazy activity in the transfer portal, and, of course, the final matchup for the NCAA championship.
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Today's number, $1.2 trillion. That's how many dollars the U.S. government racked up in deficit spending in the first half of this fiscal year, on track for more than $2 trillion for the full year. That is a roughly 20% increase from the previous year. Thank God for fiscal conservatism. Welcome to Profiteer Markets. I'm Ed Elson. It is April 14th. Let's check in on yesterday's market vitals.
The major indices climbed on hopes of a deal with Iran. Meanwhile, oil prices rose as the U.S. moved to blockade the Strait of Hormuz. We'll talk about that in a second. The yield on 10-year treasuries fell. And finally, Oracle shares surged nearly 13% after the company revealed new AI tools for the utility sector.
That gain led software stocks higher, with broader sentiment turning positive to start the week. Okay, what's happening? The US Navy has blockaded the Strait of Hormuz. The blockade went into effect yesterday morning after peace talks in Pakistan collapsed this weekend. In a post on Truth Social, Trump threatened to, quote, eliminate any Iranian ships that come near the blockade.
Oil jumped nearly 8% on the news, climbing back above $100 per barrel. By the afternoon, Trump said Iran had reached out about negotiations and oil prices paired some gains. This latest trouble at the Strait follows a hot inflation report back in the States. where the price of oil has already pushed gas prices higher.
So here to discuss what this blockade means, what these latest developments in Iran mean, we are speaking with Michael Gapin, Managing Director and Chief US Economist at Morgan Stanley.
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Chapter 2: What insights does Michael Gapen provide on inflation and oil prices?
Michael, we have a blockade on the blockade. And it's a little hard to understand how everyone feels about it because we do have oil prices obviously rising, but then also we have stock prices rising. I mean, investors seem to be somewhat bullish in a lot of ways coming into the week. What do you make of this blockade? What does it actually mean for investors?
Well, you're right that I think investors, I don't want to use the word complacent because certainly they're not complacent. But I think they're optimistic in the sense that the interpretation of markets is that The day-to-day events here are probably still what they would call in a de-escalation camp, meaning it doesn't appear like things are escalating in a way.
So oil is staying around this $100 per barrel level. That's certainly a lot higher than it was going into it. But the view from the market is $100 oil may not be great, but it's something the U.S. economy can withstand and the global economy can withstand as well. So it's inflation's rising. Yes, that will crimp purchasing power. We can talk about that.
But it does not appear that oil is at a level that would destroy demand, right? Because a little bit of oil, I mean, I should say it's been more than a little, but a large increase in oil, it initially shows up inflation. But if it rises too much, then what it starts to do is weaken activity. And I think the market is telling you, we're in that first stage. We're in that first part.
It's likely an inflation story. It may dampen demand, but the global economy should remain in an expansion in 2026. And that's why I think stocks have rebounded.
What do you make of the inflation report that we saw as well from March? Came in at 3.3%, two-year high, gasoline up over 20% in a single month. I mean, that inflation report was pretty bad, but of course it is measuring, I mean, the immediate effects of... the war in Iran. I mean, as the U.S. economist over at Morgan Stanley, like, what are you supposed to do with that data?
Is that meaningful in your long-term projections of how things are going to go?
It's certainly meaningful for where we think headline inflation is going, right? So we typically split out Headline and core. Core is X energy and X food because these are commodities determined in global markets. And core kind of gives us a view of where underlying inflation trends may be going. And the data history in the U.S.
I mean, this goes back 30 to 40 years now where shocks to oil tend to push headline inflation higher in the U.S., But it often has very limited second-round effects on core. That's important from the economist's point of view because you're saying, okay, we get the direct effect from energy. We can't avoid that. It goes right into gasoline prices very quickly in the U.S.
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Chapter 3: How does the Anthropic Mythos model impact cybersecurity?
And like, for example, food costs do involve a lot of transportation. So it's conceivable maybe we do get some second round effects this time. So history says we won't, but we can't be too blase about it. Right. And we may get it. The other point I'd like to follow up on that, it's a good point you make, is right now we're still largely talking about this as the effect of higher oil prices.
Mm-hmm. What you're getting at with the closure, the potential long-term closure of the Strait is, well, at some point, this may turn into a quantity story. So right now, I might be able to get as much oil as I need at a higher price. What happens if it's not available at any price? Then you could start to see things through the lens of supply chain disruptions like we had during COVID.
Where that's going to show up first is in Asia, because I think, as you know, about 85% of the oil that comes out of the Strait of Hormuz, its destination is Asia. So if some economies are going to experience outright shortages first, it will be there.
uh and and then you're talking about i can't get the oil or as you say the fertilizer uh or the distillate that that i need therefore activity has to to stop so those are the risks we could get second round effects on inflation because we've been above target for for so long or this this conflict could go on long enough where it actually it changes from price effects to quantity effects then
You're right, we could see a much more persistent inflation story.
Right. It is really interesting, and kind of depressing almost, that when you look through history, basically what you're describing is that when oil prices rise, the reason that everything else doesn't rise is because people are so strapped for cash that you literally can't test them that much further. Either way, the situation is you're testing the American consumer literally to their limit.
And if you hit that limit, then there is a world in which, you know, companies will basically say, okay, well, we can't raise our prices further because they're just not going to pay for this. It does get into sort of murky territory, I think, when we think about things like food, where it's like, well, you got to pay for food.
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Chapter 4: What are the implications of the Mythos model for tech companies?
But, I mean, it's just striking that we are getting to that point. Yeah. Just from an investment perspective, I mean, the way this story has changed is getting almost comical. Like, we start with... you know, we're only going to be in Iran for four or five weeks. Then we say, actually, we're going to increase that and we're going to create a deadline.
And then we get to the deadline and we say, we're going to escalate this. And then we say, actually, no, we're not escalating it. Now we have a deal. And then we say, actually, wait, no, the deal didn't really work because now more bombs are being dropped. And so now they're going to blockade the thing. So we don't have a deal. Now we're going to blockade in response. I mean...
In a funny way, nothing is really happening here. And yet every time something happens, the market is reacting and saying, OK, something's changed. Now we have a blockade. Now we don't have a blockade. Now oil is going to pass through fine. And to me, I'm sort of like, shouldn't we just not even be reacting at all? What is the correct response to what we're seeing?
You laid it out very well. I would argue that markets are reacting a little less to the headlines now than they were two to three to four weeks ago. As you said in your introduction, oil was up around eight, nine, 10 percent today in response to the implementation of the blockade, but US equity markets did okay today.
I do think the market is discounting a little bit the headline noise, looking through some of the day-to-day volatility in a way that it did not do it a few weeks ago. So I agree with you that it can be very disconcerting to hear headlines one way one day and the other way the next day. But I think the market's actually starting to filter that out better and volatility has come down.
I think a second factor behind that is markets had to de-risk for the first two to three to four weeks of this. Most investors were positioned for rates to fall
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Chapter 5: What strategies should cybersecurity professionals adopt in response to AI threats?
at least at the front end of yield curves, all throughout most of the world, not all the world, but much of the world. And what this oil price shock did, of course, was push yields higher. So markets needed to rebalance and de-risk and get out of positions and kind of get flat or neutral, as we would call it. That process leads to a lot of initial volatility.
But now that positions have been squared, to use the terminology of the industry, and risk is a little more neutral, now markets can afford to look through some of this headline noise.
Yeah. I mean, we've seen how investors are reacting. You know, as an economist, it's a slightly different job because you're not necessarily trying to make a bet on what's going to happen. You're just trying to understand what are the possible potential scenarios, what are the possible futures. I guess...
As an economist, I mean, when you put your economist hat on, how seriously have you taken these developments in terms of their potential to, I guess, adjust the trajectory of the U.S. economy? Like, when you see the headlines and you see, okay, now he's blockaded the blockade, do you look at that and then say, okay, well...
this is going to change the economy in this way, or this isn't going to change things? I mean, how is an economist supposed to digest what's happening here?
So the way that we've approached it is to kind of think of the world through three lenses, three possible paths here. One is kind of the everything goes back to normal and we return to February 27th. We think that's very unlikely. We think there has been a structural regime shift in the balance of power in the Middle East and the way oil flows in and out of the strait.
So we're not here thinking, hey, if we just get over this or that, things are going to go back to where they were six to eight weeks ago.
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Chapter 6: How is the U.S. government responding to cybersecurity risks?
So that leaves us kind of two possible options. outcomes. Obviously, there's more than two, but I'm just in terms of trying to think about how things may go. And one is what I'll call the oil is high, but not too high. And then the second one is oil moves so high as to create recessionary kind of outcomes.
So there's a non-linearity here where above a certain price, oil becomes really problematic for the U.S. expansion and the global expansion. Below that level, it's kind of what I was saying before. It's about a spike in headline inflation. It suppresses demand a little bit in the U.S., but the U.S. economy continues to go and the expansion continues.
After all, we had about $120 per barrel oil at the beginning of the Russia-Ukraine conflict. That was a slightly different U.S. economy at that point in time, a lot of fiscal stimulus in the economy, a lot of jobs being added. But this price level of oil is not unusual.
So we have passed it through the lens of essentially saying, well, the average consumer, about 2.5% of their spending goes to gasoline. Lower middle-income households, it's more like 4% to 5%. It's about double the average. And so what it's really doing is that shock, that hit to real disposable income and real purchasing power is basically offsetting
the fiscal stimulus that we assumed from the One Big Beautiful Bill Act. So in some of our prior conversations before the Iran conflict started, we were talking about how optimistic the outlook was for the U.S. this year. We've trimmed the sales on that from growth rates that could be above 2.5%, closer to 3% maybe, and thinking, well, This is just going to offset that fiscal stimulus.
Maybe it's another year of growth around 2%. But you're getting inflation moving higher. Maybe we get the Fed cuts that we were expecting. Maybe we don't. Maybe the Fed stays on the sideline. So right now we're saying it's a headwind. But we need to be watchful, as we were saying, that maybe it becomes a quantity story. Maybe it does re-escalate. Maybe oil moves to $125 to $150 a barrel.
And then I think equity markets would look much weaker, sentiment would be worse. And in addition to weaker spending, maybe what you get then is negative wealth effects. And the private sector that says, well, let's delay that capital spending plan. Let's delay those hiring plans. And then the economy can slow down much more abruptly.
All right. Michael Gapin, Managing Director and Chief U.S.
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Chapter 7: What are the broader implications of AI in cybersecurity policy?
Economist at Morgan Stanley. Michael, always appreciate your time. Thank you.
Thank you.
After the break, we look at Anthropix cybersecurity threat. And if you're enjoying the show, please follow our new Prof G Markets YouTube channel. The link is in the description.
This is advertiser content brought to you by Virgin Atlantic. Ed, a couple weeks back, I got you a birthday gift, not to pat myself on the back, but it was a pretty good one.
It was indeed. You surprised me with Virgin Atlantic upper-class tickets to London. So, tell us all about it. It was pretty incredible. From the moment I entered that upper-class cabin, I have to tell you, I felt like a VIP. Anything I needed, a drink, snack, assistance with the seat. Flat seats. Flat seats. That's the key.
Had the four-course meal, got my champagne, very delicious, enjoyed the food.
And the journey home?
The journey home was great. I went to the Virgin Atlantic LHR Clubhouse, that's the Heathrow Clubhouse. Heathrow Clubhouse was awesome. Got myself a coffee, headed over to the meditation pod that they call the Soma Dome. Kind of felt like a sort of spaceship where you relax and think nice thoughts. So I did that for a little bit.
Then we went over to The Wing, which are these acoustically sealed booths where you could do some work. You could even record a podcast. I didn't do that, but maybe I should have. It was a very enjoyable experience.
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Chapter 8: Why is law enforcement's role crucial in the current economic landscape?
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We're back with ProfgMarkets. Anthropic announced its most powerful model yet last week and decided the world isn't ready for it. Model called Claude Mythos found thousands of previously undetected software bugs and identified security vulnerabilities in every major operating system and web browser.
Instead of a public launch, Anthropic is limiting access to a group of the world's biggest tech companies, including the company's major competitors. The consortium known as Project Glasswing will use mythos to find and patch vulnerabilities before bad actors do. How powerful is this model really? And what does it mean for cybersecurity in the future?
Joining us to discuss this, we're speaking with Teresa Payton, CEO of Fortalus Solutions and former White House Chief Information Officer. Teresa, I mean, this model... regardless of what we even know about it, has just totally shaken everyone's confidence. And it was very scary that they basically got together and said, we're not even going to release the product because it's that powerful.
What do we know about this model? And what are your takeaways from the announcement of Claude Mythos?
Sure, absolutely. Thanks for having me. And this is a very important topic for a couple of reasons. One, I know there is sort of a camp that says, well, maybe this is a marketing ploy, or maybe they're overplaying their hand on this and it's not as bad as we think.
And for all intents and purposes, they're allowed to say that for now until we have a third-party point of view, because this is self-reported by Anthropic. However, Anthropic at their ethos talks about having an ethical constitution, and they've brought in a lot of experts from the outside to talk about safety and ethics and security and reliability.
So let's assume the self-reporting is accurate for right now until we know more. If it is accurate, that means that Mythos as a frontier AI is actually the smartest AI on the planet right now. And if it is true based on their self-reports, it's going to be the best and the worst nightmare for cybersecurity teams everywhere.
I'm going to quote somebody on my team who said, I won't say the name, a bomb just went off in the cybersecurity industry and we all need to read everything we can about it to understand how it can help us and how it can be used against us.
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