War, Wells, and the Waning Dollar
What Happened
- Iran shifts historical wartime strategy from proxies to direct, state-on-state strikes.
- Oil continues to climb, with WTI Crude back over $100/barrel.
- The petrodollar is facing its most existential crisis in half a century.
Why it Matters
- Iran has been the number one state sponsor of Islamic terrorism in the world for decades. The Iranian regime has always been able to rely on superficial plausible deniability because, after all, they weren't the ones committing the acts, it was just the proxy groups that they laughingly deny funding. Now, with the Iranian regime overtly fighting against its enemies, investors can no longer pretend that tensions in the middle east are contained. This marks a monumental shift for the region, as well as financial markets.
- A barrel of oil effects far more than the price you pay at the pump. In reality, those barrels of black gold have their oily claws in every aspect of your life, even if you don't realize it. Oil is the number one driver of inflation because every consumer good relies on oil to be manufactured, transported, etc. When the price per barrel rises, inflationary fears rise with it. WTI Crude just closed the week at over $100/barrel, the first time since 2022.
- Since the dawn of time (1974) the world has purchased oil using the USD. If country XYZ wanted to buy oil, they would take their fiat currency, convert it to dollars, then purchase the oil. This is one of the key drivers in U.S. economic dominance, and now its under threat. The United States is beginning to lose some of its currency backing to eastern block nations. BRICS nations are using workarounds to purchase oil by other means, subverting the U.S. economy and adding a long-term threat to the dollar that cannot be taken lightly.Â
The Alpha Angle (not investment advice)
- Long $XLE: Right now the only thing that seems certain is that companies are forced to pay a war premium on energy. After a significant dip last week, $XLE is primed to move higher. Oil is printing massive cash flow while traditional equities are suffering.
- Long $UUP: The ETF that tracks the dollar. We know the last portion of our title is "the Waning Dollar" which signals that we're bearish on the USD. We will discuss all of the long-term headwinds the dollar is facing, but for now investors are in panic mode. The dollar remains one of the few things the world can still trust as a safe-haven.Â
Let's Dig Deeper
Iran's Changing Warfare Model and Inflation
Hezbollah, Houthi Rebels, Hamas, all very dangerous terrorist groups that are directly backed by Iran. Following an attack by Israel in 1982, Iran funded the foundation of Hezbollah. Essentially, Iran helped to IPO Hezbollah. And, just like a bank bringing a hot new company public, Iran has been collecting dividends from their terror proxies. The relationship has been simple, Iran pays the proxies, and the proxies pull the trigger. The terror group gets the money it desperately needs and Iran gets to progress its agenda without directly getting its hands dirty. All of that has changed.
When the Houthis attack a ship off the coast of Yemen it's a nuisance, but companies see it as a necessary and acceptable risk. When a nation says that no enemy ships are allowed through the waters that run along their coastline it becomes a blockade. The best chart to illustrate the fear in oil markets is the $OVX (Oil Volatility Index). The OVX measures the market’s expectation of 30-day price volatility for crude oil; think of it as the VIX, but for the energy sector instead of the S&P 500. Here is the chart for your reference:
Looking at the chart we can see the obvious MASSIVE spike since the war began. What's interesting is that over the last two weeks it has actually stabilized and retraced back down to the 90s. It's too early to tell but this could be one of two things.Â
- A normal retrace before heading higher.
- The panic is subsiding.Â
As an investor, you should keep a close eye on the Federal Reserve, not just the Iran war. High oil volatility (120+) makes the Fed terrified of a 1970s-style inflation spiral. When that volatility drops back down, it gives the Fed permission to stop talking about rate hikes and start focusing on recession risk again. We know that the labor market has cracks, we know that tech stocks are overvalued, and we know that multiple other metrics of how to judge economic health are signaling a recession. If the panic and war-risk premium of oil begins to stabilize and decline, the Fed will be free to get back on course with rate cuts.
The Twilight of the Petrodollar
To understand why the Dollar is "waning," you have to understand the 1974 Quid Pro Quo. Following the 1973 oil crisis, the U.S. and Saudi Arabia struck a deal: the U.S. would provide military protection and hardware, and in exchange, the Saudis (and eventually all of OPEC) would price oil exclusively in U.S. Dollars.
This created synthetic demand for the Dollar. If Germany wanted to buy oil from the desert, they had to buy Dollars first. This system made the USD the undisputed king of global trade for half a century. Here are three major threats the dollar is currently facing:
-
The mBridge Bridgehead: The multi-CBDC (Central Bank Digital Currency) platform has gone from a pilot project to a live settlement engine. Iran, China, and the UAE are now settling massive energy contracts in seconds without touching a single U.S. intermediary bank.
-
The "Gold-for-Oil" Swap: Because of the sanctions we discussed earlier, Iran has pioneered a "Physical Settlement" model. By trading crude for physical gold bullion, they are essentially reverting to the most "neutral" currency on earth, completely bypassing the $DXY.
-
The Strategic Realignment: For 50 years, the U.S. was the primary "Security Provider" for the wells. As Iran moves to direct strikes and China moves in as a mediator, the "Security-for-Oil" contract is being ripped up.
We have to assume that President Trump understands the concept of the petrodollar with his business background. So the question must be asked: Why is he doing all of this? To be honest, we aren't sure. The USD losing its global dominance is detrimental for the U.S. and it is a very real possibility. The dollar won't crash overnight, but these issues cannot be ignored. Only time will tell if President Trump has a behind-the-scenes plan that nobody can see, and this whole ordeal may end up being one of those 4D chess examples that supporters of his love to mention. However, for now all we can do is make investment decisions based on the information WE HAVE. That's why our current position on the dollar is bullish short-term, bearish long-term. We hope to see evidence soon that our long-term view is wrong.
In Short
- Iran is now waging war as a state, rather than using proxies like the past.
- Panic in the oil markets is exceptionally high, yet is showing signs of subsiding.
- We are bullish on $UUP and $XLE in the short term.
- The petrodollar is facing its most significant headwinds in half a century.
Want to see how we’re positioned for this? Click the link below and get access to our Inner Circle, which includes our LIVE portfolio, weekly updates, and live alerts.
Thanks for reading! Until next time, good luck and Godspeed.
Disclaimer:
The views and opinions expressed in The Pioneer Perspective are those of Daniel Harlow and Pioneer Financial, LLC and are provided for informational and educational purposes only. Nothing in this publication constitutes financial, investment, tax, or legal advice.
Market data and information are obtained from sources believed to be reliable, but their accuracy cannot be guaranteed. Past performance is not indicative of future results, and all investments involve risk, including the potential loss of principal.
Readers are encouraged to conduct their own research or consult a qualified financial professional before making any investment decisions.