MacroVoices #538 Lyn Alden: Is The War Really Over and What’s Next For Markets?

Lyn Alden cautioned that the Iran memorandum of understanding leaves major unresolved details including the fate of enriched uranium, on-site inspectors, enforcement mechanisms, and whether Iran can toll the Strait of Hormuz after a 60-day period. She noted the agreement is essentially an attempt to reconstruct the 2015 to 2018 nuclear deal the US previously exited, and that the view the worst of the conflict is past is already consensus rather than new information. She expects the headline to continue for at least weeks if not months.

WTI dropped roughly 885 basis points to 69.28 as geopolitical risk was priced out, with crude selling off to approximately pre-crisis levels in both flat price and time spreads. Gold declined roughly 900 basis points back toward the 4,000 level not seen since October of the prior year, and the US dollar index rallied 210 basis points to 101.54, decisively breaking above a 15-month trade range. Alden attributed the limited oil price spike during the conflict to large strategic and commercial reserve stockpiles that were drawn down, and said countries that emptied reserves should use the current period to refill storage rather than draw further.

The dollar breakout surprised observers who expected the Iran conflict to be the main driver holding it up as a safety trade. Alden said the move is largely driven by repricing of rate hike odds and the ongoing AI trade drawing capital into US equities. She expects the dollar to trade in a choppy band over any foreseeable horizon, partly because the euro is the biggest comparable and the European economy is not compelling, and predicts continued dollar strength will eventually pressure both international and US economies and cause it to flatline again.

Alden described the Fed's hawkish but vague tone as partly driven by the need to maintain credibility and avoid appearing as a puppet of a president who favors rate cuts. She has been calling for a gradual liquidity scenario rather than a large imminent QE event, and characterized allowing banks to hold more Treasuries via capital requirement deregulation as similar to QE in its pro-liquidity effect. She argued that nominal debt levels will keep rising aggressively and that the Treasury Secretary's forecast of deficits returning to 4 percent of GDP is not credible, with mid to high single digits being the more likely outcome. She said large persistent fiscal deficits make it difficult to stand against owning high-quality equities and scarce assets, and that the more likely near-term manifestation of fiscal imbalances is rising populism rather than a spectacular debt crisis.

Alden first wrote bullishly about stablecoins in January 2021 when the market cap was approximately 30 billion dollars and predicts it will eventually exceed one trillion dollars. She cautioned that some demand pools stablecoins would take market share from already hold Treasuries, so net new Treasury demand is only incremental. Even a full trillion in new stablecoin market cap generating 500 billion in new Treasury demand represents only about three months of US deficits. She concluded stablecoins extend the dollar's runway around the margins but are not a permanent fix for the deficit problem.

Alden said the AI-driven capex cycle has legs and can continue longer than most expect, but draws a parallel to the dot-com boom where the underlying thesis proved correct yet equities still experienced a major bust. She expects a much larger version of the Nvidia-style boom-bust cycle to play out across AI equities broadly. She is skeptical of AI model companies specifically because switching costs for customers are low when a better model emerges, and is more constructive on actual bottlenecks in the buildout that are harder to reproduce. She views China as having a meaningful advantage over the US in energy infrastructure for AI, citing a more coherent energy policy, and notes advanced nuclear investments by AI companies will take roughly ten years to materialize, creating a near-term energy gap.

Patrick Ceresna identified electricity as the next major bottleneck in the AI buildout after chips, making natural gas increasingly important as a bridge fuel. His trade of the week is to be long natural gas, preferring UNL over UNG to avoid negative roll yield drag when the curve is in contango rolling into winter gas series. He has also been examining the December 2026 natural gas futures contract, which is basing along yearly lows, as a vehicle for bull call spreads to build convex upside with defined risk.