MacroVoices #530 Daniel Lacalle: China and The Us Will Decide The Outcome of The Iran War

Global money supply growth is running at its fastest pace since 2021, led by China but also rising in the United States and the United Kingdom, with Europe more subdued. Lacalle argues that rising money supply combined with stable or declining money velocity causes asset prices to rise as markets discount the destruction of purchasing power. CPI methodology in the EU and UK has progressively reduced the weighting of food and shelter, understating true cost-of-living increases, with food and shelter costs in those regions having risen by twice the cumulative CPI increase over the past seven years. Persistent inflation is driven by governments spending without limit, accumulating debt, and printing money to prevent any reduction in aggregate demand.

Iran peace negotiations collapsed after Trump canceled the Vance and Witkoff negotiating trip. At the time of recording, front month WTI was over $110 and spot Brent was over $120, with June RBOB gasoline breaking out to an all-time new high at $3.59. Eric Townsend emphasized that unlike COVID in 2021, the current energy crisis involves actual physical scarcity of fuel rather than a chosen economic shutdown, making money printing an insufficient remedy. He noted that oil from the Persian Gulf takes several weeks to reach its destination, meaning supply disruption effects were only beginning to be felt at refineries, which he said explained a single-day move of approximately $8 to $9 in crude. He predicts that if the strait remains closed for two to three more weeks, a global energy price crisis becomes inevitable, and even if it reopens immediately, disruption effects already in motion will be felt for at least six more weeks.

Lacalle argues that both the United States and China can wait out the Iran conflict far longer than most market estimates assume, and that treating the conflict as equally damaging for all parties is clearly incorrect. The United States is the world's largest oil and gas producer at 13.6 million barrels per day and is net exporting 2.8 million barrels per day. China holds the largest stockpiles of any essential commodity it needs, has banned exports of refined petroleum products, and maintains a competitive advantage through its continued partnership with Russia, which produces 10 million barrels per day and exports around 4.5 million. Lacalle predicts China will make no move to pressure Iran on Strait of Hormuz access at least until the Trump-Xi summit, and that all current tensions point toward Trump and Xi reaching an agreement that wraps together the trade war and the Iran conflict, or things get very bad for everyone.

Iran itself is the most impacted by the strait shutdown because 25 percent of its GDP and 60 percent of its government revenues flow through it. Iran closed 2025 with protests across the country, approximately 60 percent inflation, and capital flight, meaning its economy was already obliterated before the current conflict. Europe has only a few weeks of jet fuel supply remaining and will face prices five times the normal level rather than running out entirely. Consumer sentiment in the European Union is already at its lowest level since the pandemic, and services are in contraction for the first time in roughly three to four years. After the 2022 Ukraine War energy spike resolved benignly, European policymakers treated it as a policy success rather than a warning signal and failed to secure supply flexibility. Lacalle warns that windfall profit taxes on energy companies target precisely the firms that could support security of supply and invest in system flexibility, and predicts severe margin erosion, supply chain disruption, and major problems for the aviation and automotive sectors heading into summer.

Lacalle argues oil prices have already reached their top and the futures curve is in steep backwardation, with WTI one year forward at approximately $70 per barrel, discounting significant disinflation by year end. He predicts oil is unlikely to fall back to $50 because policymakers are focused on maintaining aggregate demand, unlike the demand destruction seen after 2008. The geopolitical risk premium in oil prices, absent for three years, has returned and may persist for a prolonged period. Lacalle argues the United States has shifted from being a shock amplifier to a shock absorber in oil markets, the opposite of its historical role in 1973 and 2008, and the US dollar has behaved like a petro currency in this crisis, rising alongside oil prices.

Lacalle explains that leveraged long-gold short-US-dollar positions built over the past 18 months are the primary cause of gold falling when oil rises, reversing the traditional geopolitical hedge relationship. Geopolitical risk worsening around July 2025 caused the dollar to stop falling and begin rising, triggering margin calls that forced investors to sell gold positions. Central banks that accumulated gold over the past three years also began selling some gold to reduce the impact of dollar revaluation on their local currencies. Eric sold more than half of his gold position when gold moved above 4,730 and predicts gold could temporarily test 4,000 if another leg down occurs, with the next meaningful buy signal requiring a breakout back above 5,000. He still believes gold is in a secular bull market and will eventually reach new all-time highs.

Patrick attributes the recent equity advance to a systematic flows squeeze rather than macro fundamentals, noting that market breadth is under 50 percent at current 52-week highs.