Quick Thoughts: The Hormuz Hedge
When Valuation Meets Geopolitical Shifting
Warning: This article is likely outdated by the time you read it due to the breakneck speed of the Global Macro environment.
A two-week truce was declared, nearly broken, and then reinstated through tentative agreements between the US, Israel, and Iran. This has shown exactly how much this conflict is rattling global markets and economic valuations on everything. And I mean everything!
I know! More Oil Talk
Starting with oil, Brent Crude reached a peak of $112 per barrel only to plunge toward $92 once the players started talking. Right now, Brent sits around $100, creating a neck-breaking whiplash that has everyone guessing. This just emphasizes the fragility of the system - investors are de-risking one minute and pulling “risk-on” maneuvers the next based on every incoming headline.
Something I’ve been pondering is how this volatility is beginning to consolidate. The ups and downs are having smaller percentage jumps. As of April 13th, Brent jumped about 9% solely on the news of the US blockading the Iranian blockade of the Strait of Hormuz.
Yes, it’s a bit confusing, but that 9% jump is similar to the start of the war (March 1, 2026), where it soared 22% just nine days later. We are still in the early days of these new blockade parameters set by the US. We won’t see the full effect until later, but for now, volatility and price premiums seem tamed. It makes a case that the market is getting used to this whiplash behavior and believes the conflict won’t hit oil as hard as we feared.
Granted, there are so many moving parts. Things could get worse and oil could hike back into previous highs, causing the cost of living and inflation to tick up even further.
The Elephant in the Room
We have to remember the big elephant in the room for oil: futures prices.
Prices for physical oil for immediate delivery are at $150 per barrel! This new record is what Europe is being forced to pay because of the supply shock of physical oil. This has become the “wait and see” moment the world is experiencing.
More Hormuz Nightmares: LNG
I’m going to brush over the importance of Liquified Natural Gas (LNG) here, so bear with me. The blockade of the Strait of Hormuz has effectively blocked 12% to 14% of LNG exports to Europe.
Production for goods like fertilizer, aluminum smelting, and the intense manufacturing for semiconductors could all see even more strain on an already burdened supply chain. It’s nearly impossible to say how bad it can get without losing our minds.
The Damodaran View: Inflation isn’t going anywhere
Professor Aswath Damodaran has been proving that valuations are beckoning for higher returns. With the risk-free rate climbing to around 4.32%, the market is expecting inflation to hang around for a bit, requiring higher returns on equities.
Here is his recent article:
It is becoming clear that investors are watching how the world handles these unprecedented shocks. As the Professor says, the market is a better truth-teller than anyone else. So, let’s watch what the market is saying.
The Dalio View: Dollar Dominance in Contention
Ray Dalio has been top-rated in predicting what may happen. Through his Changing World Order framework, the US is in a late-stage debt cycle. High debt levels are meeting intense geopolitical conflict.
As energy supplies are weaponized, dollar dominance becomes stressed. Geopolitical factions are turning into separate economic blocs, causing nations affected by the Hormuz blockade to fragment and look for different trade alliances or “neutral” currency settlements.
Dalio’s perspective:
This won’t happen overnight, but things are being set up for China to find different means of energy and monetary policies if necessary.
The Bottom Line
We are seeing a rare alignment where valuation mechanics (Damodaran’s rising ERP and risk-free rates) are being directly fueled by geopolitical cycle shifts (Dalio’s debt and power conflict).
The “safe” play for the rest of Q2 is looking for assets with high pricing power that can pass through these $150/barrel energy costs. Those are few and far between. All in all, we are still waiting to see what comes next - whether that’s a humanitarian issue, further military action, or a trend back toward stability.