Economic and Market Implications as the Iran War Escalates

By Victor Sperandeo with the Curmudgeon

Boots on the Ground?

The arrival in the Middle East on Saturday of 3,500 U.S. Marines from the 31st Expeditionary Unit suggests the situation in the Strait of Hormuz may be shifting towards a “boots on the ground” engagement in Iran. That’s despite President Trump telling reporters on March 19^th, “I’m not putting troops anywhere.”

In response, Iranian officials stated that any such U.S. occupation would bring "captivity, dismemberment and disappearance" for any aggressor, according to the Wall Street Journal. “Iran’s powerful armed forces, proud and dignified, are counting the moments—should these threats be carried out—to destroy your army," the report said.

Iran reportedly maintains close to one million personnel capable of mobilization, with significant defensive positions in mountainous regions. A sustained military conflict in the region would have severe repercussions, both human and economic, potentially reshaping global energy markets and triggering sharp dislocations across financial markets and banking systems.

Hard Assets, Bitcoin and Inflation vs Deflation:

Analysts attributed the recent sharp declines in gold, silver and industrial metals to a repricing of interest rate expectations, a stronger U.S. dollar, and liquidity-driven liquidation of overextended positions. However, a more realistic explanation lies in a deflationary scenario.

Inflation is not the issue because few people can pay higher prices for SCARCE resources due to supply shortages. It has nothing to do with the printing of money yet. This is why Gold, Silver, Platinum, Palladium, and Copper, among many other industrial metals declined to recent new lows. If it were inflationary they would be at new highs! It has been stated that Gold was sold for liquidity reasons, but Victor 100% disagrees with this thesis.

Until the Federal Reserve intervenes meaningfully, tightening liquidity will continue to weigh on both commodities and digital assets such as Bitcoin. The Fed has made no substantive move toward balance sheet expansion or significant rate cuts, aside from a limited addition of short-dated Treasury bills announced in December. That initiative — roughly $240 billion over six months — represents only about 0.007% of the $31.3 trillion U.S. GDP, a negligible stimulus.

Since 1959, the U.S. money supply (M2) has expanded at an average annual rate of 6.72%, yet the past two years have seen only 4.08% growth — roughly 39% below trend. Moreover, credit write-offs and repayment losses, such as BlackRock’s recent private credit write-down, effectively reduce circulating money but remain unaccounted for in official aggregates.

Taken together, these factors suggest a contracting liquidity environment which was corroborated by Capital Wars Michael Howell’s latest message, “The Dire Straits: Liquidity Tide Goes Out.” He correctly states, “Global Liquidity continues to skid, and measures of market liquidity are crashing” as depicted in this chart:

While Howell maintains that accelerating inflation has reappeared, Victor firmly believes that a deflationary scenario is much more likely.

Cartoon of the Week:

Iran War is Very Unpopular in the U.S.:

The latest polling shows Americans are strongly against the U.S. war with Iran.

l Pew Research found 61% disapprove of how Donald Trump is handling the conflict, versus 37% who approve.

l Reuters/Ipsos found 61% disapprove of the strikes, with 35% approving in its March 20–23 poll.

l AP-NORC found 59% say U.S. military action in Iran has “gone too far.”

l Fox News found 58% oppose the action, while 42% support it.

The polling points to a public opinion headwind for the administration, especially if the conflict drags on or energy prices stay elevated. The strongest recurring theme is not just opposition to the strikes themselves, but skepticism about whether the war makes the U.S. safer in the long run.

Victor’s Conclusions:

If the present conflict in the Middle East continues to restrict oil supplies without corresponding Fed monetary accommodation, a prolonged recession becomes quite plausible. However, once hostilities subside and production normalizes, oil prices are likely to move toward the $65 per barrel range.

The U.S.-Israel war with Iran should serve as a reminder which few analysts have recognized: that scarcity-driven price spikes are transitory, unlike broad-based inflation caused by sustained monetary expansion. The Fed’s reluctance to recognize that distinction risks exacerbating economic volatility rather than stabilizing it.

End Quote:

“Power is the great evil with which we are contending. We have divided power between three branches of government and erected checks and balances to prevent abuse of power. However, where is the check on the power of the judiciary? If we fail to check the power of the judiciary, I predict that we will eventually live under judicial tyranny.” Patrick Henry

Patrick Henry was an American politician, planter and orator who declared to the Second Virginia Convention (1775): "Give me liberty or give me death!" A Founding Father, he served as the first and sixth post-colonial governor of Virginia, from 1776 to 1779 and from 1784 to 1786.

….………………………………………………………………………………………………………………………….

Wishing you peace of mind, good health, success, and good luck. Till next time.

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).