Episode 012: Doomberg - Strategic implications of the Iran war

Introduction In this episode of Thematic Edge, Marvin Barth and Mark Farrington are joined by John Cochrane, Senior Fellow at the Hoover Institution, former Professor of Finance at the University of Chicago Booth School of Business and author of The Fiscal Theory of the Price Level. One of the most influential voices in modern financial economics, Cochrane brings his trademark intellectual curiosity and willingness to challenge conventional thinking to a wide-ranging discussion of economic models, inflation, fiscal policy and central banking. The conversation explores why sophisticated economic models can fail to capture economic reality, how government debt and fiscal credibility influence inflation and exchange rates, and what Switzerland’s remarkably strong currency reveals about the relationship between fiscal discipline and monetary stability. The discussion also examines Japan’s response to supply shocks, the reliability of inflation measures and whether central banks have misunderstood the role of expectations. Ultimately, it raises a fundamental question: can central banks deliver price stability without the support of responsible fiscal policy? Key themes * Economics beyond conventional boundaries: Cochrane reflects on his career spanning finance and macroeconomics, the growing specialisation of academic research and the contributions of 2026 Nobel laureates Robert Hall and Michael Woodford. * Economic models and their limitations: Marvin challenges the Federal Reserve’s persistent underestimation of US potential growth, while Cochrane argues that models are most useful as ‘quantitative parables’ rather than forecasting machines. * The fiscal theory of the price level: Cochrane explains how confidence in a government’s ability to honour its debt influences inflation, providing an alternative perspective to conventional monetary explanations. * The Swiss franc and fiscal credibility: Switzerland’s fiscal discipline offers a compelling explanation for the franc’s sustained strength, illustrating how fiscal policy influences exchange rates and sovereign borrowing costs. * Japan’s response to supply shocks: Mark explores Japan’s use of subsidies to cushion rising energy and food costs, prompting a debate over the economic consequences of suppressing market price signals. * Measuring inflation: From headline and core inflation to trimmed means, the discussion examines whether central banks’ preferred measures provide better guidance or obscure persistent inflationary pressures. * Inflation expectations and credibility: Marvin and Cochrane explore the distinction between financial market expectations and those of consumers, questioning whether central bank communication can substitute for credible policy action. * The Fed’s mandate and fiscal responsibility: The discussion concludes by questioning what price stability should mean, whether Congress should provide clearer direction and why monetary policy alone cannot guarantee low inflation. Timestamps 00:00 Introduction and welcome to John Cochrane 01:50 A career spanning finance and economics 05:50 The 2026 Nobel Prize and New Keynesian economics 13:16 Economic models and the Federal Reserve 16:21 Why the Fed underestimates US potential growth 18:37 The limits of economic forecasting 24:00 Fiscal theory, inflation and exchange rates 27:37 The fiscal theory of the price level explained 33:20 Economic models as quantitative parables 38:10 Japan, subsidies and the dangers of distorting prices 42:26 Core versus headline inflation 51:04 What should price stability really mean? 53:14 Inflation expectations and the lessons of 2021 58:15 Forward guidance and the credibility of central banks 1:02:46 The Fed, Congress and fiscal responsibility Further reading * Themistocles’ Lesson for the Fed, Seriously, Marvin?!, 8 May 2026. Based on Marvin’s presentation at the Hoover Institution Monetary Policy Conference, this research examines the Fed’s forecasting failures, inflation expectat

Introduction The European crisis that Marvin Barth and Mark Farrington have long warned of appears to have begun…while Marvin and Mark were focused on the “mother of all resolution windows” in the US ahead of the US midterm elections, the AI race, Fed credibility, and geopolitics. Mark and Marvin review the thesis for why Europe was a growing pile of dry tinder waiting for a spark before turning to what events and forces coalesced to create that spark. They then discuss how Europe’s increasing self-isolation, its deep and difficult to reconcile problems, and the loss of a credible German balance sheet limit sources of “circuit breakers” to the crisis, raising the stakes and differing markedly from 2011-12 when Europe last had a debt crisis. Marvin then leans on Mark’s deep experience managing institutional portfolios in financial crises of the last four decades for both the “generic” crisis playbook and the specific ways to position for and play this crisis. Key Themes Europe as “the pit of despair” Marvin and Mark review why they have long warned of an impending European crisis: * Persistent low-growth, the wrong economic model, * poor energy policies that have left it with the highest energy costs in the world, * unsustainable member-state debts dependent on the German balance sheet, * how Germany’s rash fiscal splurge under Merz undermined the whole structure, * increasing political instability, * and the dual hits of the Ukraine and Iran wars worsening all other vulnerabilities. Triggers of the current crisis Proximately, the crisis began with riots in France, but Mark and Marvin point to pressures from rising US real rates and the increasing international competition for capital as the ultimate trigger, plus the surprising role of the UK moving closer to Europe. Europe’s increasing isolation As Chinese mercantilism has evolved from a source of European growth to a threat to it and America has turned more defensive, Europe has increasingly isolated itself in the “rump” of the post-War liberal order as North Asia, the Gulf States and Latin America increasingly align with the US, leaving Europe with few friends or reliable sources of capital. A lack of resolution mechanisms Unlike in 2011-12 when Europe last faced a crisis it no longer has an internal member with a strong enough balance sheet to “solve the problem” by credibly backing European Central Bank interventions, while Europe’s isolation leaves it without likely external help. The crisis playbook What are the general rules for a portfolio heading into a crisis and how do you look for opportunities. What are the specific risks and opportunities in this crisis. Timestamps 00:00 Introduction: Europe’s emerging crisis 02:22 The crisis arrives while attention is elsewhere 05:48 Why Europe was a pile of dry tinder 10:42 What triggered the crisis now? 15:05 US real rates and the competition for capital 22:11 The surprising role of the UK 29:55 Europe’s increasing isolation 36:40 Where is Europe’s circuit breaker? 43:09 The crisis playbook 48:15 Countertrades and relative value opportunities 52:32 The US resolution window and the dollar 55:02 Why the traditional volatility trades may not work 58:27 Closing thoughts Further reading Brexit Blues, ten years on, Seriously, Marvin?!, 1 July 2026 Observations: Closing thoughts for 2025, Thematic Markets, 22 December 2025 Keystone Cops, Seriously, Marvin?!, 28 October 2025 La Cosa Nostra Americana, Thematic Markets, 4 March 2025 Leitmotif 7: Breaking point? Thematic Markets, 22 January 2025 Leitmotif 6: A “Western Spring”? Thematic Markets, 21 January 2025 Leitmotif 5: Time to pay the piper, Thematic Markets, 20 January 2025

Introduction In this episode of Thematic Edge, Marvin Barth and Mark Farrington revisit the “resolution window” stretching from the summer through the US midterm elections examine what market signals we’ve gleaned so far. They assess the latest inflation data and central bank decisions, the changing shape of the US Treasury curve, Scott Bessent’s management of the bond market and the strength of corporate earnings. They also examine the growing anxiety surrounding AI, from regulation to US-China competition to the rapidly expansion of financing needs for the investment boom. They note that many of the outcomes feared have so far failed to materialise. Earnings remain strong, Treasury markets have stabilised and capital investment is broader than the “only-AI” narrative suggests. Yet uncertainty remains as the US midterm elections approach and political narratives are approaching a crescendo. The challenge for investors is separating noise from signal. Key themes • The resolution windowMarvin and Mark assess the major events that have passed since their last discussion and whether the balance of evidence is beginning to shift. • Inflation remains stickyThe latest CPI reading was widely characterised as “hot”, but both question that interpretation but agree that inflation expectations remain sufficiently elevated to require further tightening. • Central banks still have work to doThe Fed, Bank of Japan and ECB are all signalling that they may finally understand that their inflation problems have not disappeared, even if their approaches and communication differ. • Bessent and the Treasury curveThe discussion examines how Treasury Secretary Bessent’s buybacks and clear communications have helped improve liquidity and anchor the long end of the US yield curve, drawing institutional investors back to the market. • US China relationsAhead of further talks between Washington and Beijing, Marvin and Mark consider where cooperation remains possible amid continued strategic competition, particularly around trade, technology and managing the dangers of AI. • The AI financing boomAI borrowing has increased dramatically, creating genuine competition for capital. But set against sovereign borrowing and pre-financing being assembled by institutional investors to extend the boom, the picture is more positive than many narratives imply. • The investment boom is broader than AICapital expenditure, manufacturing investment and earnings strength extend well beyond hyperscalers and the Magnificent Seven. The US investment story began before generative AI and remains much broader. • Earnings versus the wall of worryCorporate earnings continue to surprise positively. Marvin and Mark discuss why strong fundamentals can coexist with persistent bearish narratives and how investors should interpret that divergence. • Noise, politics and resolution eventsAs the US midterms approach, political narratives are likely to become increasingly prominent. The discussion focuses on how investors can distinguish those narratives from underlying economic and market signals. Timestamps 00:00 The resolution window revisited03:25 Inflation, the Fed and the global central bank cycle16:06 Treasury fair value, term premia and Scott Bessent23:05 US Japan and US China relations29:26 Earnings continue to surprise33:20 AI risk, regulation and strategic competition39:19 AI financing and competition for capital46:19 Why the investment boom is broader than AI52:04 Trading the wall of worry59:01 Global bifurcation and what comes next Further reading Missing Productivity, Thematic Markets, 3 June 2026Why the US productivity and investment boom began before generative AI and extends far beyond the technology sector. The US outlook takes shape, Thematic Markets, 21 August 2025Marvin’s framework for stronger than expected US growth, persistent inflation and a broader capital expenditure boom. Global Entropy: Enter the dragons, Thematic Markets, 9 November 2023The foundation of the G

Introduction In this episode of Thematic Edge, Marvin Barth and Mark Farrington reunite to examine what is really driving the rise in sovereign bond yields around the world. Their central argument is that the move is bigger than fiscal policy or any single government: capital is becoming more expensive as investment demand rises, global savings come under pressure and central banks struggle to rebuild credibility. The conversation moves from Kevin Warsh’s first months at the Federal Reserve and the bond market response to the Iran war, to Treasury buybacks, FX intervention and the structural effects of Localization. Looking ahead, they map out what Mark calls the “mother of all resolution windows”, spanning the September Fed and Bank of Japan meetings, the Trump Xi summit, Q3 earnings, and the US midterm elections. They finish with the market implications, including why the yen may offer one of the clearest ways to trade the path to resolution. Key themes * Competition for capital: Rising investment demand, from Localization, defence spending, energy infrastructure, and AI datacenters, is colliding with pressure on global savings. The result is structurally higher real yields and steeper sovereign yield curves. * Fed credibility: Kevin Warsh’s first months as Chair have left bond markets in “trust but verify” mode. The September meeting now poses a difficult test as softer inflation data collides with the Fed’s need to restore credibility. * Looking through shocks: The Iran war demonstrated why central banks can no longer assume markets will simply look through supply shocks. With credibility already depleted, geopolitical shocks are feeding more directly into inflation and term premia. * Bond market intervention: Treasury buybacks and currency intervention are examined as tools for improving liquidity and influencing market behaviour, rather than evidence of covert QE or an impending Treasury market crisis. * The mother of all resolution windows: The Fed and BOJ meetings, the Trump Xi summit, Q3 earnings, and the US midterms create a sequence of events that will determine the ultimate direction for the dollar, equities and global rates. * Equities compete for savings too: Strong US returns to capital continue to attract global savings, while growing corporate debt issuance places companies in more direct competition with sovereign borrowers for capital. * The yen reversal: A more hawkish BOJ and movement towards neutral rates could finally break the yen carry trade, creating the conditions for a sharper fall in dollar-yen and potentially more supportive conditions for Japanese assets. Episode recorded: 8 September 2025 Timestamps 00:00 Introduction: Why global yields are rising 02:30 Marking Kevin Warsh and the Fed to market 04:04 The Treasury sell off and steepening yield curve 07:20 Bond markets move to “trust but verify” 11:30 Why the September Fed meeting matters 20:09 Central bank credibility and the Iran shock 22:11 The structural competition for capital 23:40 Localization, investment and higher real yields 26:53 Treasury buybacks and yen intervention 30:47 Why higher yields do not necessarily signal crisis 35:24 The “mother of all resolution windows” 38:11 US earnings, equities and the dollar 40:48 CPI and the September Fed decision 42:36 Why equities also compete for global savings 43:45 What to expect from the Trump Xi summit 46:34 Is the Fed becoming untradeable? 50:51 The case for a yen reversal 54:57 Japan, capital flows and positive contagion 56:39 Europe and the US election: what comes next Further Reading * Observations: Marking to market, Thematic Markets, 8 September 2026 * The velvet glove, Thematic Markets, 20 June 2026 * Themistocles’ lesson for the Fed, Thematic Markets, 8 May 2026 * Alea iacta est, Thematic Markets, 23 March 2026 * What debasement? (Debasement Part II), Thematic Markets, 8 March 2026 * May you live in interesting times, The Devil, Thematic Markets, 5 January 2024 * The Politics of Rage,

Introduction In this episode of The Thematic Edge, Marvin Barth and Mark Farrington speak with Alexander Stahel, Chief Investment Officer of Burggraben Holdings and author of The Commodity Compass, about an emerging crisis in global petroleum product markets. The conversation examines how the war with Iran, Ukraine’s increasingly sophisticated attacks on Russian refining infrastructure and China’s focus on domestic energy security have combined to create severe pressure in diesel, gasoline and jet fuel markets. They explore how Ukraine’s strategy has moved beyond damaging Russian energy infrastructure to disrupting the economic and political networks that sustain the Russian state. The discussion also considers whether these pressures could destabilise the regime, or instead strengthen the patronage system around it. Key themes * A global petroleum product crisis: Why the real pressure is in diesel, gasoline and jet fuel rather than crude oil. * China’s strategic energy reserves: How China’s inventories helped absorb the initial shock, and why Beijing may not use its spare refining capacity to support global markets. * Ukraine’s refinery strategy: How targeted drone attacks on critical equipment are causing lasting damage to Russia’s refining system. * Russia’s domestic fuel shortage: Why Russia is moving from a major exporter of refined products towards gasoline and diesel deficits at home. * Why refined products cannot be easily replaced: How crude quality, refinery design and established supply routes limit substitution. * The Siloviki system: How fuel shortages interact with the patronage networks that underpin Russia’s political economy. * The Russian endgame: Whether economic disruption could destabilise the regime or strengthen by increasing the power of patronage. * A perfect storm for diesel and gasoline: How Russian disruption, Middle Eastern supply risks and limited spare refining capacity are tightening global markets. Episode recorded 21 July 2026 Timestamps 00:00 Introduction to Alexander Stahel and The Commodity Compass 02:58 Alexander’s background and commodity investment approach 06:43 Why he created The Commodity Compass 10:28 The Iran war and the global energy market 12:24 Why the disruption has not yet produced a larger oil price shock 13:26 China’s inventories and their role in stabilising the market 17:04 Algorithmic trading, oil futures and the physical market 19:51 China’s approach to refined product imports and exports 26:12 Ukraine’s changing strategy against Russian energy infrastructure 27:23 Mykhailo Fedorov and the transformation of Ukrainian drone warfare 29:48 Why targeting critical refinery equipment matters 31:22 Russia’s dependence on Western refinery technology 35:16 The decline in Russian refining capacity 36:27 How Ukraine selects its refinery targets 38:47 Russia’s emerging gasoline and diesel shortages 40:28 What global markets have lost from Russian product exports 41:44 Why established fuel supply chains are difficult to replace 43:42 The Siloviki system and Russia’s political economy 51:33 Whether economic disruption weakens or strengthens the regime 53:00 Ukraine’s strategy and the possible Russian endgame 58:00 Public criticism, elite tensions and potential political tipping points 01:03:22 The greatest risks facing global energy markets 01:04:01 The global petroleum product crisis 01:05:59 Whether China could relieve the shortage 01:07:22 Red Sea shipping risks and the Houthis 01:08:09 The perfect storm for diesel and gasoline 01:09:00 The Strait of Hormuz and the outlook for product markets Further reading * Observations: Dazed and confused, Thematic Markets, 10 April 2026 Why the ceasefire may have been a strategic pause, including the need to release tankers trapped inside the Persian Gulf and prepare for renewed conflict. * Perspective, Seriously, Marvin?!, 8 April 2026 Eight potential paths for the Iran war, the Strait of Hormuz and global energy markets, viewed through the hi