So Far, So Good in The Strait of Hormuz

I’ve written well over two thousand posts over the last sixteen years, and this will be the first that doesn’t include any charts that I drew myself. That feels a bit strange but I’m writing this post to draw everyone’s attention to what is really important about this Iran War.

The war itself is largely irrelevant. Whether the US, Israel or Iran are bombing, or blockading, or blustering doesn’t really matter. All that is really important on the bigger picture are the Strait of Hormuz and, to a slightly lesser extent, the Bab al-Mandab Strait, the two key chokepoints for world trade routes in the Middle East:

What is important here is that the amount of tankers and trade volume through these Straits, and that traffic through the Strait of Hormuz dropped over 90% at the start of this war and has on average remained at or below that level since then.

To put that in perspective the last oil tanker that passed through the Strait of Hormuz before this war started delivered that cargo on Monday 20th April. After the war started there was a grace period while the tankers still on the sea delivered their cargoes. That grace period has now ended and the Strait is still closed.

There are still oil reserves that have been released to work through, but once they are used up this supply shock will be fully on, and prices will rise to destroy demand until supply and demand for oil balance again. That is what an oil shock is really about.

There are two previous oil supply shocks historically to compare this crisis with, the first in the 1970s and the second when Iraq invaded Kuwait in 1990. In terms of the percentage of world oil supply disrupted both were smaller, and this disruption is already close to lasting longer than in 1990 and may yet last longer than the five months in 1973.

The summary below looks at what happened in these two previous supply shocks to oil prices, equity valuations, GDP and inflation and it is grim reading:

It isn’t just about oil of course, 30% of helium worldwide comes from Qatar and and much of that capacity has been damaged in this war and will be offline for years. That capacity is not obviously even possible to replace, as it is produced as a byproduct of Natural Gas, and prices have already risen over 50% in the demand destruction cycle to balance supply and demand. Helium is vital to semiconductor manufacturing among other uses.

Other major disruptions include aluminium and urea, which is very important for fertilisers. The chart below is Urea prices from the start of 2022, rising rapidly back towards the 2022 highs. This will restrict world food production and deliver higher food prices that will feed though (no pun intended) over the next few months:

In terms of the impact on equity prices, the milder outcome was in 1990 when stocks were slightly overvalued and stocks dropped 21% peak to trough. In 1973 stocks were somewhat more overvalued and markets dropped 52% peak to trough over the next two years, only recovering to the previous highs after seven years.

So are stocks overvalued now? Well the chart below is the Schiller P/E ratio since 1870. The current level is 20% higher than the high in 1929, and about 10% lower than the all time high in 2000. For comparison the Schiller P/E ratio was at about 18 in 1973, and 17 in 1990 against a historical mean (before 1990) in the 14% to 15% area. It is currently over 40. There is a strong argument that stocks are extremely overvalued here.

How fragile is the market? Are market expectations diverging from the real economy? The chart below is a look at the S&P and Consumer Sentiment since the start of 2007. It is a thought-provoking chart:

The bottom line here is that all that really matters here is the supply shock to the world from this war in the Middle East. Nothing else is of global importance. Until commerce is flowing freely through these Straits, whether or not Iran is charging a toll, the world is exposed to a severe economic shock , stagnation and inflation. The US is a large oil exporter and is more insulated from this crisis than many, but is a long long long way from immune.

Once this supply shock ends we can see how bad this shock is likely to be as the effects feed through over the next few months and years. So far the speed of international trade has insulated the world from this supply shock but that won’t be the case going forward.

We have yet to see the real effects of this Iran War, and it is important to remember that the news about the war that we see every day is mostly just noise, of no real importance on the bigger picture here.

Overall this situation reminds me of a joke my father used to tell. A man jumps off the top of the Empire State Building and halfway down the building is heard to say ‘so far, so good’. It isn’t the fall that kills you, it’s the landing. That is the thing to focus on.

If you like my analysis and would like to see more, please take a free subscription at my thebiggerpicture substack, where I publish these posts first and for members (from next week) also bi-weekly videos looking at equity indices, bonds, currencies and commodities. Those videos are posted on my Youtube channel after a seven day delay. Links to all my posts from my charting substacks are also always posted on my twitter.

The Four Horsemen - Cotton, Wheat, Corn and Soybeans

There were four big setups, each covering multiple tickers, that I was looking in my bi-weekly The Bigger Picture webinars last year and at the start of this year that looked very strong, but I was struggling to come up with any decent fundamental reasons why they might play out.

That changed when the US attacked Iran on 28th February, and since then I have been looking at these four big setups as follows:

War - I looked at the oil setups in my posts on 3rd and 13th March. Those setups have made the first targets but haven’t yet made the extension targets at retests of the 2022 highs on $BRENT, $WTIC and $GASO.

Pestilence - In my last The Four Horsemen post on Friday 27th March I was looking at the US Dollar, and that hasn’t changed much since as we are currently waiting to see if attempts to end the Iran War might be successful.

Famine - Today I am looking at the third series of setups, on $COTTON, $WHEAT, $CORN, and $SOYB.

Death - This will be the next and last in this series looking at bonds, and will give a preview of what might happen if the current US experiment in ever rising deficits and debt ends really really badly.

In term of the current ceasefire and the Strait of Hormuz almost everything about the ceasefire is obscured by a fog of confusion, but what does seem clear is that the Strait of Hormuz remains under Iranian control, that when it is open at all they are charging a stiff toll on all vessels passing through the Strait, and are insisting on payment in either Yuan or Cryptocurrency. In case you were wondering, they are welcoming payment in Trump Coins:

The main focus on the trade disruptions from the Iran War has been on oil, but there are other important goods which have been severely disrupted including Liquefied Natural Gas (LNG), Helium (vital for semiconductor manufacturing), and fertiliser, as the Persian Gulf is a very large source of Urea. It is the fertiliser disruption that concerns us today.

That disruption has been serious, prices are well up and there are serious shortages and price spikes that have already had a serious impact on the Spring planting season for both Wheat and Corn. Enough disruption may already have been caused to deliver the squeeze in supply that I am looking at in the charts below, and all four of the crops I am looking at below use a lot of these disrupted fertilisers.

The first on the list is Cotton, which broke up on 13th March from a double bottom looking for a target in the 88.64 to 89.13 range. This is a big move but looking at Cotton from the high in 2022 after the invasion of Ukraine this is still less than a 38.2% retracement of the falling wedge from that high into the lows made last year. This could potentially further deliver a move higher into a retest of the 2022 high, in which case I’d be watching the possible IHS neckline or asymmetric double bottom resistance at 107.25, close to the 50% retracement of that rising wedge.

COTTON weekly chart:

The second on the list is Wheat, which broke up very slightly from a double bottom looking for a target in the 739 to 742 range. This is a big move but looking at Wheat from the high in 2022 after the invasion of Ukraine this is still less than a 38.2% retracement of the falling wedge from that high into the lows made in 2024 and 2025. This could potentially further deliver a move even high, in which case I’d be watching the possible IHS neckline or asymmetric double bottom resistance at 720. There’s nothing here currently to suggest a move that might exceed at 61.8% retracement of that rising wedge.

WHEAT weekly chart:

The third on the list is Corn, where a double bottom setup has formed that on a sustained break over 504.50 would look for a target in the 624 to 640.25 range. This would be just under a 61.8% retracement of the falling wedge from the 2022 high to the lows in 2024 and 2025. There’s no obvious path higher at the moment unless a right shoulder forms near the possible IHS neckline in the 564.50 area.

CORN weekly chart:

Soybeans are the only one of these crops that had not formed a double bottom by the start of this year. I had been expecting one as a clear bear flag channel was forming for over a year from the low in 2024. That bear flag broke up though, came close to a retest of the possible IHS neckline at 1257.94, and has since been pulling back in what may well be an IHS right shoulder. A sustained break over 1235 would look for a target in the 1560 area, close to a 76.4% retracement of the falling wedge from the 2022 high into the low in 2024. There is no obvious path higher from there.

SOYB weekly chart:

To a large extent these setups are just routine retracements of their big moves down from the major highs made in 2022, and they are very possibly not dependent on a further escalation of the Iran War. These moves may already be baked in from the disruption of the last few weeks affecting the crops to be harvested over the next few months.

I’m planning a post over the next few days looking at possible options trades to take advantage of these moves.

The next post in this series will be looking at the bullish setups on bond yields. These are by far the scariest looking setups here and I’m aiming to get that out by the end of April.

If you like my analysis and would like to see more, please take a free subscription at my thebiggerpicture substack, where I publish these posts first and for members (from next week) also bi-weekly videos looking at equity indices, bonds, currencies and commodities. Those videos are posted on my Youtube channel after a seven day delay. Links to all my posts from my charting substacks are also always posted on my twitter.