Oil Should Be $200 A Barrel Right Now — The Reason It Isn't Is Far Worse Than The War

Welcome to Impact Theory with Tom Bilyeu. In today’s deep dive, Tom unpacks why economic analysts missed the mark when predicting oil prices amid the ongoing war in Iran. Despite forecasts of oil soaring to $200 a barrel, prices unexpectedly plummeted—even as major shipping routes were disrupted and military tensions escalated. Tom takes us through a detailed timeline of the conflict, examines the surprising role of China’s shrinking oil demand, and reveals how outdated economic assumptions failed to account for a global downturn already brewing beneath the headlines. By connecting supply, demand, and the hidden frailties of both the Chinese and U. S. economies, Tom explains why falling demand—not war or supply shocks—now holds the key to understanding the global market’s future. Whether you’re an investor, entrepreneur, or simply curious about the forces shaping our world, this episode exposes the deeper story behind today’s economic anxiety and offers practical strategies for navigating uncertain times. Sign up for my AI Masterclass: https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=you https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=youtube&utm_medium=social tube&utm_medium=social https://tombilyeu.com/ai-masterclass?utm_campaign=TBS-Livestream&utm_source=youtube&utm_medium=social Check us out wherever you get your podcasts: Spotify:https://open.spotify.com/show/1nARKz2vTIOb7gC9dusE4b?si=a8daffd2bf1f48fd Apple: https://podcasts.apple.com/us/podcast/tom-bilyeus-impact-theory/id1191775648 Do you need my help STARTING a business? Join me here inside ZERO TO FOUNDER: (https://tombilyeu.com/zero-to-founder) Get the exact systems, mindset shifts, and principles that built a $1B brand delivered straight to your inbox every week. Subscribe for free (https://tombilyeu.com) https://tombilyeu.com Check out our Video game - Project Kyzen: (https://projectkyzen.io/) https://projectkyzen.io/ Catch Me Streaming on Twitch - (https://twitch.tv/tombilyeu) Link to IT discord:https://discord.gg/TZKJ2etPbT Tom's Favorite Things List: https://amzn.to/41Ftt7e For Business inquiries: [email protected] mailto:[email protected] FOLLOW TOM: Instagram:https://www.instagram.com/tombilyeu/ Twitter:https://twitter.com/tombilyeu YouTube:https://www.youtube.com/@TomBilyeu Quince: Free shipping and 365-day returns at https://quince.com/impactpod Whatnot: Download the Whatnot app today and get free shipping on your first order. Ketone IQ: Visit https://ketone.com/IMPACT for 30% OFF your subscription order ATT Business: Switch to AT&T Business at business.att.com http://business.att.com Incogni: Take your personal data back with Incogni! Use code IMPACT at the link below and get 60% off an annual plan: https://incogni.com/impact Pique: 20% off at https://piquelife.com/impact Netsuite: Right now, get our free business guide, Demystifying AI, at https://NetSuite.com/Theory https://netsuite.com/Theory See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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• 1:24Speaker 01

  Most estimates would have put us, at this point in this war, we'd be looking at almost $200 a barrel.

• 1:30Speaker 00

  China is certainly a big part of the story, but it's only part. We need to start with the timeline so we can see the glimpses into the real health of the global economy that the war in Iran has given us. On February 27th, Brent crude closed at $72 a barrel. The next morning, the war begins. Within days, the IRGC declares the Strait of Hormuz closed, and tanker traffic through the world's most important oil choke point collapses to almost nothing. By March 9th, Brent hits $119 a barrel. The International Energy Agency calls it "the largest supply disruption in the history of the oil market",

• 2:12Speaker 00

  and analysts respond by publishing scenarios with oil near-term at $150 a barrel and possibly reaching 200, and potentially staying there for as long as the strait stays closed. By April 30th, it seemed like that may really come to fruition with Brent going above $126. At this point, everyone is holding their breath, assuming that prices will continue to climb if the conflict continues.

• 2:39Speaker 01

  Well, oil prices are rising again. US oil prices have topped $100 a barrel for the first time since 2022.

• 2:47Speaker 00

  Oil prices are taking a hit as the US and Iran have that tug of war over the Strait of Hormuz. But it doesn't, thankfully. In mid-June, the US and Iran sign the MOU. Iran agrees to reopen the strait, and the US agrees to lift its blockade on Iranian ports. Oil drops like a rock, giving up $17 a barrel in just four trading sessions. By early July, crude had fallen back below its pre-war price. And this gives us our first glimpse into the fact that something is impacting prices other than the war. Because here's the catch. The strait still hadn't gotten back to normal operation, but the prices made it look like it had. And then, the ceasefire blows up, ships start getting attacked again, the US and Iran go back to launching missiles at each other,

• 3:32Speaker 00

  and we get glimpse number two. Oil jumps, but only by 4.4%, and then goes right back down within 24 hours, settling in at its pre-war price. Then, just this week, the biggest escalation of the entire war. The US Navy reimposes its blockade. Iran declares the strait is closed until further notice, and supertankers start getting hit again, killing at least one mariner. That causes oil to climb, but only into the mid-'80s. That's a far cry from where it was in March when it spiked and credible people were predicting $200 a barrel for as long as the straits closed. So what gives? Did everyone learn to stop worrying and love the bomb? Or is something else going on?

• 4:16Speaker 00

  Unfortunately, something else is going on, and it's much bigger. What the data shows is that analysts were missing a problem with the global economy itself that's so big, even the war couldn't obscure it. As with most things in the economy, it is a complicated confluence of things. But every time the economy fails to respond to the war in the expected fashion, it makes it easier to see what's actually driving what is essentially a global recession. At the beginning of the war, most analysts were still using a 50-year-old assumption, not realizing it had already stopped being relevant. For 50 years, every model of an oil shock has assumed that energy needs are non-negotiable.

• 4:58Speaker 00

  Historically speaking, energy needs are considered to be inelastic. Countries need what they need, so if you reduce the supply, the price is going to go up as a matter of course. It's straightforward supply and demand. If energy demand is constant, when supply varies, the price will move accordingly. Factories need to run, trucks need to move, planes need to fly, and all of that requires oil. And none of that is going to change, certainly not quickly, just because something interrupts the supply chain. In 1973, we had a perfect example of how true this is. When the Arab oil embargo removed roughly 4 million barrels per day from the market, about 7% of the world's supply at the time,

• 5:40Speaker 00

  the price of oil quadrupled in just a matter of months. The shock was so bad, it was a major factor in pushing the US into the deepest recession since the Great Depression. But even all of that economic trauma wasn't enough to reduce overall energy demand and bring the price back down. People needed what they needed, so reduced supply drove cost up, exactly as you would expect. That's what makes today so surprising. The '73 oil embargo pushed us into a massive recession, but still couldn't kill demand. Yet here in 2026, a totally different story is unfolding. The Strait of Hormuz carries roughly 1/5 of the world's oil.

• 6:22Speaker 00

  When Iran shut it down, an estimated 10 to 14 million barrels per day, two to three times the size of the 1973 shock, went offline. When you run those numbers through the standard model, $200 for a barrel of oil starts to seem pretty believable. And at first, the physical oil market behaved exactly the way the standard model predicted. While paper oil futures traded in the low 100s in April, the actual delivered cost of oil was as much as $150 a barrel. Economists at Brookings described the market at that time as "a race between temporary buffers", so inventories, pipeline workarounds, the episodic tankers that were actually slipping through, and the duration of the closure.

• 7:07Speaker 00

  Their projection in May of '26, "if the strait doesn't reopen soon, the buffers will be depleted, and prices could approach $150." The buffers' argument initially seemed to explain why prices rose more slowly than the old model predicted. But, over time, it became more and more obvious that even the buffers couldn't explain what was really happening. The strait never returned to normal operation, but prices not only didn't level off, they tanked. They fell back through $100, then $80, then all the way back to the pre-war price, even though, as I write this, the US is actively and aggressively bombing Iran. To explain the fact that the market is just shrugging that off,

• 7:49Speaker 00

  you have to stop looking at the supply side of the equation and start looking at a far more terrifying side of the ledger: demand. China, the largest oil importer on the planet, reduced its purchases at a scale the best commodity desks in the world didn't think was possible. The ship-tracking firm Kepler estimates that China accounted for roughly 74% of the total decline in global crude trade during this disruption. That is staggering. China did, by choice, what a massive recession couldn't get the US to do back in '73. China can use top-down authoritarian rule, sure, but you would expect there to be some pushback to a pullback of this magnitude.

• 8:34Speaker 00

  But so far, there's nothing. And to make it even more confusing, China can access cheap oil again, but they don't appear to want to. They didn't even return to where they were just a few months ago, when the price was back down to pre-war levels. Between February and May, China's seaborne crude imports fell from 11.4 million barrels to about 6.4 million per day. That's a drop of more than 40% to the lowest level in nearly a decade. State-owned refiners cut processing to 66.3% of their capacity. It's a record low, according to data going back to 2021. And instead of buying more crude at normal prices and ramping back up, refiners instead chose to

• 9:19Speaker 00

  run down China's strategic stockpile. That is a very surprising choice when crude is available at good prices. Analysts at Societe Generale estimated that China's pullback did more to cushion the Hormoz shock than the coordinated strategic reserve releases of the United States, Europe, and Japan combined. On the surface, it's tempting to read that as strategic mastery. It's tempting to see that as a country at the height of its powers. They were able to bank a billion barrels, and now they're reaping the rewards by being able to switch off imports on command. Now admittedly, some of that is true. China was very wise to build up an enormous stockpile. But the stockpile only tells you how China was able to stop buying

• 10:04Speaker 00

  and still avoid catastrophe if demand was elevated. It doesn't tell you why, even when the war was paused and oil was back below its pre-war price, they didn't start buying again. As of early July, cheap crude was available to anyone who wanted to buy it. And yes, as Bloomberg reported, China still did not resume buying at anything close to its original pace. There are several reasons why China might make the decision to prolong its reduced accumulation of oil. But as we're going to go through each of these possibilities, I think you're going to see there's only one explanation that holds up under scrutiny. But let's walk through them. The first possibility is the buyer-strike argument. China is the largest crude oil customer on earth, and the biggest buyer in any market

• 10:49Speaker 00

  has pricing power if they're willing to strike, not buy, and walk away. This theory adopts the frame, China is merely negotiating. By delaying, they're able to take advantage of Iran's already weakened position and leave them hanging just long enough that they'll consider a price that they otherwise wouldn't. Once China gets the more desirable price, then they'll restock. There is even precedent for this strategy. In 2021, when prices ran up, Chinese refiners deferred purchases, lived off their inventories for months, and then bought the dip. Kepler's analysts are leaning towards this interpretation today, but I think the data proves that isn't true. They're warning that the real oil shock is going to be when China comes back into the market at full force,

• 11:34Speaker 00

  and the whole industry has to reprice to accommodate their pent-up demand. I think that's crazy, though. Here's the problem with that story. If China were just refusing to purchase in order to get a lower price, you wouldn't expect them to also reduce their processing. If their economy is working like normal, everyone still needs fuel. Given that, you'd expect China to maybe delay buying, but keep running their refineries to process the billion barrels of crude that they already own that are in their stockpile. But they're not. Instead, China hasn't just reduced their purchases, they've also cut their refinery runs to record lows at the same time. A buyer that's simply striking with healthy demand wouldn't do that. The second argument for China's behavior

• 12:18Speaker 00

  is the commercial argument. The thinking is that oil refining is a margin business. Given that China is artificially holding the price of gas low to keep their citizens happy, it doesn't make sense to buy oil until the price comes back down, at least if they have the reserves to hold out, and they do. Otherwise, if they buy at the elevated prices but keep the cost at the pump low, they could lose money on every barrel of oil that they buy. Now, that's super logical, but as we have discussed and as Bloomberg's reporting indicates, China has been cutting due to tepid demand for oil at home, not because of the supply shock. The math backs that up. Because with crude at $72, a refinery would be making money hand over fist if there was demand for the oil.

• 13:03Speaker 00

  If the demand is there and the price is right, which it was, then they're just leaving money on the table. And it's not like China's refineries are reduced by a little. They're at record lows despite the prices coming back down. If the margin argument were the real story, cheap crude would have fixed the problem and returned at least their refining back to normal. But nothing has changed. And that's likely because the problem was never the cost. Taking a short break, but there's more Impact Theory after. Stay tuned.

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  All right, thanks for sticking with us. Let's jump right back in.

• 16:48Speaker 00

  The third take on this is the war gaming argument. The looming collision between the US and China over Taiwan looms large in the near future. And most strategists agree that in a Taiwan scenario, America's first move will be to choke off China's seaborne energy supply. When you look at the last four months through that lens, you can see China's just running a dress rehearsal, and one that went incredibly well. China was able to absorb the loss of the vast majority of its Gulf supply and was still able to keep fuel flowing at home and do it all without any visible social disruption. The problem with that reading is that if this was really a dress rehearsal, you'd expect to see China drawing heavily down on its reserves and rationing very carefully

• 17:32Speaker 00

  in order to endure the hardship. But that's not what they did. They were holding prices artificially low and burning through their stockpile and not upping their purchases so that they could refill their stockpile. They're acting like reducing their stockpile is part of the point. What actually is happening in China is that they took a 40% import cut and barely needed to touch their reserves. In fact, through the first two months of the war, they were still adding to their reserves because demand was so low that even with reduced imports, they could keep adding. By late May, the pile was down about 20 million barrels from its all-time high. That's less than 2% of a drawdown.

• 18:17Speaker 00

  Now, the fourth take on this situation is the substitution argument. This may be the most popular hypothesis, but it too is going to fall to the evidence. It goes like this. China's oil demand is going down, but it's going down as a part of their larger strategy to transition to solar and other forms of energy. Around half of their new car sales, LNG is displacing diesel and trucking, and even China's own major oil companies have said publicly, gasoline demand is already at or near its structural peak. If this theory is true, then falling imports are just evidence of a successful energy transition strategy arriving at the perfect moment. Now, they really are transitioning their energy supply, but the numbers don't add up with the rate of decline that we're seeing now.

• 19:02Speaker 00

  They are dramatically far apart. China is moving fast, but the energy substitution rate is only moving at about a few percentage a year. We just saw a 40% drop in a few months. To transition away from one fuel source to another is not just about having the new energy supply. You have to physically turn over your entire fleet first. You can't just dramatically cut oil imports and hope for the best. Plus, an EV transition would first show up as a gasoline plateau, then a decline. We're just seeing a decline. And part of what's driving that decline, at least in China's diesel needs, is China's housing crisis, which has huge implications

• 19:45Speaker 00

  for trucks, construction sites, and factories. Gasoline and jet fuel were still growing in 2024, but diesel fell so hard that it drove the total refinery output down with it. If this was EVs coming online, it wouldn't affect diesel, certainly not first. But construction sites going dark because they're in the middle of a housing crisis, that would. Here's the harsh reality for China and the entire global economy, frankly speaking. China's oil pullback did not start with the war. Imports peaked in 2023 and fell in 2024. Refinery runs peaked in 2023 and fell in 2024.

• 20:25Speaker 00

  Diesel consumption declined outright, and all of this is in the EIA's published data, and has been, by the way, since before a single shot was fired in Iran. So whatever has been eroding China's demand for oil, it was already eroding it in peacetime. All the other arguments are just likely cope. So why did China keep buying, importing, and refining oil prior to the war in Iran if demand has been eroding since 2024? In a word, optics. The CCP lies endlessly about their data, and the oil import number is a single figure that the entire world watches as the proxy for Chinese oil demand, which is itself a proxy for economic activity.

• 21:10Speaker 00

  As long as the buying continued, the Chinese economy looked healthy, and they could just keep building up their oil reserves. But then the war came, and the buying stopped. And for once, a collapse in Chinese imports needed no explanation at all. Everyone credited the war, much like people that overhired during COVID used AI as an excuse to dramatically trim their staff without hurting their reputations. The supply shock from the Iran war didn't cut China's demand. That was not the cause. The war just gave them the sufficient cover story they needed to stop using the stockpile to hide their economic slowdown. That's why they burned through it and weren't racing to replenish. There's obviously no way to prove that Beijing planned it that way,

• 21:52Speaker 00

  but no one argues that the demand indicators peaked in 2023. The stockpile buildout masked the decline, whether it was an international strategy or not, and the war gave them the cover story they needed to pump the brakes. So to answer the question from earlier, why isn't China buying $72 crude when they were previously? They're not, because they don't have the need. Oil imports are what economists call derived demand. Nobody wants crude for its own sake. Refiners buy it to make gasoline and diesel, and they only make what they believe people are going to buy. Cheap crude solves a cost problem, but it doesn't seem that China has a cost problem. It has a demand problem. And that is far more consequential for the global economy than whether the strait is open today or not.

• 22:38Speaker 00

  It may end up being more consequential than whether or not Iran is getting bombed. Now, it's all going to come down to what problem China is actually trying to disguise. Is it just a housing slowdown? Have they managed a soft landing? Or are they, as I'm saying, in a recession? Or, as economist Jeff Snyder says, are they in a depression? Let's look at the stats. China has been in or near crisis-led deflation since 2023. They have falling prices across much of their economy. If that were because of widespread innovation, it would be great. But while China certainly has pockets of innovation, innovation is never spread evenly across the entire economy, and it certainly doesn't move in a matter of months like it would need to

• 23:22Speaker 00

  to account for the rapid and dramatic demand destruction we see in their oil usage. The nature of China's falling prices is best understood as the classic signature of weak demand. The hard truth is that China's property sector is still working through a massive, multi-year downturn that is in the process of wiping out roughly $18 trillion of household wealth. That's equivalent to an entire year's worth of China's GDP. While the CCP obviously tried to downplay the magnitude of this crisis, this is likely a massive part of the oil decline story we're watching unfold now. When a similar crisis hit Japan in the 90s after their real estate bubble burst,

• 24:06Speaker 00

  it had a dramatic impact on people's buying power and psychology. Whenever the asset holding the majority of someone's net worth falls for years on end, they just stop spending. When this happened in Japan, consumption fell even in places where the banks stayed healthy, and the effect ended up sweeping across the entire economy. Fewer cars were bought, fewer goods were shipped, fewer buildings were built. And every one of those declines decreases the amount of oil that's needed. It's likely playing out exactly like that in China. If economists like Kenneth Rogoff, the former IMF chief economist, and Yuan Chenyang are correct, and this really is what's happening in China,

• 24:49Speaker 00

  they could be in for a very rough road ahead. Property in China is almost 70% of the average Chinese family's wealth, and the property sector has been going up in flames for years now. That would certainly go a long way towards explaining why in April, investment in China was declining, and retail sales and industrial output both came in below forecasts. Bloomberg reported tepid fuel consumption in China, and that erosion started well before the first bomb fell in Iran.

• 25:19Speaker 01

  China's in a lot more trouble than people think. They have a banking crisis and a property crisis that are going on in parallel. The five-year plan that just came out just completely omitted their employment targets for the next five years because they're not really sure they can actually hit them.

• 25:31Speaker 00

  That intentional omission has now been confirmed by Bloomberg. For the first time in at least 30 years, China's five-year plan contains no numeric target for urban job creation. The previous plan promised 55 million new urban jobs. This one promises the ever-so-vague considerable scale. Beijing's official framing is the uncertainty is due to AI's effect on employment being hard to pin down. But whatever they say publicly, it is a red flag that historically, they've published that number through every crisis since the early 90s and are now declining to do so. Countries don't hide good economic news, especially not China. Everything we've walked through so far makes this sound like a story about China,

• 26:15Speaker 00

  but unfortunately, the story is much bigger than that. In fact, the two biggest oil markets in the world, China and the US, are pointing in the same direction, and it's not a good one. To understand what's really going on, let's look at the shape of the oil futures price curve. Not the price itself, the curve from near-term to long-term. Oil trades on a curve. There's one price for things that are going to be delivered next month, and separate prices for delivery month by month for every month after that, stretching out years in the future. If what we are witnessing was a genuine shortage of oil, the front of that curve, the near-term, would be trading at a premium. Why? Because now is when the supply shock exists, so people are going to be competing for a scarce supply and driving the price up.

• 27:00Speaker 00

  That's exactly what the war produced at first. In early June, a barrel for near-term delivery cost around $90, while that same barrel promised for December went for far less. But this didn't happen because we are facing a legitimate shortage. It happened because very few people understand how weak the global economy actually is, so they were expecting there to be huge demand, but there wasn't. That's why, about three weeks into the war, the price hike that was supposedly due to the supply shock largely vanished. The front of the curve, the part that would be strongest in a genuine supply crisis, collapsed. And by early July, the whole curve had essentially gone flat,

• 27:42Speaker 00

  with near-term barrels even briefly trading below later ones. That is insane and breaks the entire supply shock narrative.

• 27:50Speaker 01

  In a normal shortage environment, what we'd expect to see is near-term oil prices trading at a premium to those further down into the future. Instead, in the space of just a couple weeks, we've seen these curves collapse and twist into a shape that suggests the market is now saying, we're on the cusp of having too much oil.

• 28:06Speaker 00

  Now, as I record this, the war has escalated again. Who knows where it's going to be in a few days when you actually hear this? But right now, the blockade is back, tankers are being hit, and the front of the curve has jumped back up a little with the headlines, but nothing like it did at the beginning of the war before people realized just how weak global demand really is. The real smoking gun to all of this is what's happening at the back of the curve, where real long-term demand sets the price. Right now, even in all of this chaos, it's anchored down in the 60s. The market will pay a slight premium for this month's barrels, given that tankers are actively burning in the strait, but the premium is a small fraction of what it was at the beginning of the war when people were still confused, and the long tail is just pinned down.

• 28:49Speaker 00

  Traders apparently are not worried about finding enough barrels of oil in the future to meet the demand. In fact, the price seems to indicate that traders are more worried about there being too much oil available. And OPEC seems to agree. It's now cut its 2026 demand growth forecast two months running, most recently down to just 800,000 barrels per day. The buyers of US treasuries are also pointing to a weak economic forecast. The gap between normal treasury bonds and inflation-protected ones known as TIPS is called the breakeven rate. It functions as the bond market's live forecast of future inflation. And that live forecast, right now, is calling for much lower inflation.

• 29:34Speaker 00

  And that's despite the fact that inflation spent the entire spring surging. It hit 4.2% in May, which was a three-year high. But regardless of that elevation, the one-year breakeven sat at just 1.94%. That's the bond market betting that inflation will fall by more than half within a year. That would be below the Fed's own target. That begs the obvious question. If the Fed is just holding rates still, what force exactly are traders expecting to cut inflation in half? The answer? They see oil demand fading and demand destruction that has already made its way to energy will inevitably kill inflation. In fact, it's already starting to.

• 30:18Speaker 00

  The economy is getting so weak, the June CPI report just came out and it shows that prices fell by 0.4% on the month. That's the largest one-month drop since April of 2020. The annual rate is already down to 3.5%. The headline move was mostly oil unwinding. But if you look under the hood at the parts of the inflation that run on demand rather than on energy, you'll see that core prices were flat for the month. Services excluding energy were also flat and shelter was up, but only by 0.1%. The demand-driven half of inflation has stalled out, exactly like the breakevens predicted. And the Fed hasn't done anything that would have caused that.

• 31:03Speaker 00

  So something else has to be driving it. If you need even more evidence that the economy is cooling off independently of the war in Iran, here it is. In February, the US government's annual jobs benchmark revision cut 2025 job growth from 584,000 down to 181,000 for the entire year. 181,000 jobs used to be a disappointing month. Now it's the full year. That is a brutal downturn. It's the weakest non-recession year since 2003, and it came on the heels of the largest downward payroll revision ever recorded.

• 31:46Speaker 00

  Then this June, the household survey showed US employment falling by 507,000 in a single month and labor force participation dropped to 61.5%, the lowest in 50 years outside of COVID. And just to stick a finger in the wound, according to the National Association of Realtors, the median first-time home buyer is now 40 years old with first-time buyers at 21% of the market. That's the lowest share ever recorded in roughly half of what was considered normal before 2008. Something is very, very wrong with the US economy. Both China and the US are mired in economic illness.

• 32:29Speaker 00

  China's dealing with a property crash that has vaporized 18 trillion dollars of household wealth. But the question is, what's America's issue? Our home prices are sitting near record highs.

• 32:40Speaker 01

  So you see this big phase shift in '21 and '22, which is consistent with a supply shock, and then prices kind of level off. But incomes were supposed to rise, not to just where prices were, but to then to go above them. And that was the expectation that we were given in 2022. A lot of people bought into it, companies bought into it, Amazon, some of the big tech companies. Once you realize as a business, your nominal revenues are rising, but you're not actually selling more goods, you don't actually need to rehire the workforce that you had beforehand.

• 33:07Speaker 00

  Let's go through what he's calling a phase shift. It is a huge part of the story. In 2021 and 2022, the price of everything jumped up because of the supply disruptions from COVID. The overall price level leapt by somewhere between 25 and 30%, and it's never come back down. Our slowing inflation rate never meant that prices were actually falling from the COVID spike. It just meant that they were climbing less fast. And the new level is so high and is stuck around for so long, it's causing people to slow their buying. Wages spent years trying to catch up, but while they're currently even with our current inflation rate, they've never made up for the phase shift that happened in the wake

• 33:52Speaker 00

  of COVID. The ground the households lost during that period then marries with the downturn in the jobs market. And that means that corporations' revenues were going up while their headcount was being reduced. That's how one economy produces a paltry 181,000 jobs over a full year, hits a 50-year low in labor force participation, but still records stock prices at an all-time high. But the party couldn't last forever. The reason people have been able to keep up this long is they were spending down their savings and running their credit card bills up. And now they're finally hitting their limits and the economy is starting to show its true weakness.

• 34:36Speaker 00

  And that's why the price of oil is nowhere near $200 a barrel, even as tankers burn in the Strait of Hormuz. The two biggest economies in the world are both struggling, and it's highly likely that they're not the only ones struggling. And that's why I say we might have a very rocky road ahead of us and why my levels of paranoia over the economy just continue to rise. We may be looking at something more severe than a recession, and you can almost certainly forget about a soft landing.

• 35:05Speaker 01

  When you say depression, a lot of people think what you're saying is it's a big recession because you think, you know, 1930s, you had the great collapse between '29 and '32. No, the depression was not '29 to '32, it was '32 to '41. It was the lack of upside. So you look at where payrolls are versus the trend, it's eight million jobs short, which means that's eight million people who aren't working that probably should be. Maybe you make an adjustment for demographic shifts or something like that, but it's not eight million.

• 35:32Speaker 00

  We remember the Great Depression as a crash of '29, but the real hardship was the decade after. You don't need a single dramatic collapse like they had leading up to the Great Depression to have a problem. If the upside of real wage growth for the middle class never comes back, you are going to feel it across your entire economy. And when you put all of this together, the back end of the oil curve starts to make sense. It's signaling that the world is going to need fewer barrels of oil than it needs today with or without the war in Iran because everybody is pulling back. There's going to be less economic activity. The bond market is pointing at the same thing.

• 36:13Speaker 00

  It's saying that inflation is going to go down regardless of what the Fed does because demand is going to be destroyed. Long-tail oil prices aren't remaining low because the markets stopped fearing war. They're staying low because the global economy is sick. The war just made it easier to see. Since paranoia is useless unless it turns into action, let's make this information useful. The takeaway here isn't a crash is coming, sell everything. But in an economy where demand is weakening, the safety side of your portfolio should not be an afterthought. While diversification isn't sexy, the deeper I dive into this moment in economic history, the more I become convinced that being broadly allocated with a keen focus on downside protections

• 36:58Speaker 00

  is more important than ever. Now, I understand why people would still want to own risk-on assets. I certainly do. But personally, I am slowly rebalancing away from a heavier expectation of continued growth and I'm increasing my cash and cash equivalents to maintain my optionality. I'm also looking at AI's near performance with more skepticism and making sure that I can weather a prolonged storm that's measured in years, not months. It also seems very prudent right now to pay attention to the pricing curves much more than the headlines to get a better read on the market's long-term prognosis of the health of the economy. Headlines help track the front of the oil curve, for instance, but there's a much clearer signal in the long tail of the curve.

• 37:41Speaker 00

  If the long end of the oil curve starts rising and stays high, great. The weakening demand that we just walked through may be reversing. But for now, the market's bet is that demand is going to stay low. And where people actually put their money is going to be far more helpful than what any pundits say. Next, watch China's imports and ignore their statements and ignore what Trump says for that matter and watch what he actually does. He is very good at creating noise and short-term moves, but as you look farther out on the curve, the noise should fall away. And finally, on a personal level, in an economy that now produces in a year the number of jobs it used to produce in a month, optionality really does seem like the key asset.

• 38:23Speaker 00

  Predicting the future is hard at the best of times when more and more people are opting out of the labor force or just can't get in. Optionality is how you avoid catastrophe. All right, that's it for today's episode. If you got value out of this, it would mean the world to me if you would go give us a five-star rating. It helps more than you know. All right, thank you, and until next time, my friends, be legendary. Take care, peace. Let's talk about a pattern that is guaranteed to be killing your progress. You know what you need to do. You need consistent nutrition. We all do. You need vitamins, probiotics, greens. We all know that we should be doing more of it. When your morning gets chaotic, you skip it. When you travel, you skip it.

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