Stagflation, Which The Markets Still Refuse To Acknowledge

The markets have reacted with relative calm to the latest developments in the Middle East. The new attacks on Saudi oil facilities in Abha and Jizan, Iran’s threats to establish a maritime exclusion zone in the Gulf, and the Houthis’ seizure of the strategic port of Mokha ultimately caused only another spike in Brent crude prices toward $100, without any real panic.

At first glance, this reaction may seem reassuring. It gives the impression that investors still view these events as temporary disruptions to which the market will, once again, eventually adapt.

I believe this interpretation is now incomplete.

The real change no longer lies in the events themselves, but in their accumulation. Taken in isolation, each one seems perfectly manageable. Together, however, they reflect a slow deterioration in the physical capacity of the global energy system. A complete closure of the Strait of Hormuz is still not our baseline scenario. However, it is becoming increasingly difficult to ignore that the two main chokepoints in global oil trade — the Strait of Hormuz and, now, Bab el-Mandeb — are operating simultaneously in an increasingly unstable environment. Flows continue, but more slowly, at a higher cost, and with ever-shrinking safety margins.

This trend is much more evident in the physical market than in the financial markets.

While WTI is still trading around $98, physical shipments of Dubai crude are already trading around $110 per barrel, and Oman grades are exceeding $108. Premiums on available cargoes now stand at $19 to $20 above the usual benchmarks, returning to levels seen during previous episodes of major tension. Asian refiners are therefore already paying over $100 for crude oil, even as the financial market continues to trade WTI contracts below this psychological threshold.

The latest report published by Goldman Sachs sheds particularly interesting light on this divergence. The bank has raised its price forecasts and now acknowledges that disruptions to maritime transport could persist through 2027. Goldman estimates that a Brent price above $120 would become entirely plausible if average Gulf production remained sustainably four million barrels per day below its pre-war level. At the same time, analysts point out that the global deficit has narrowed from about seven million barrels per day in the spring to nearly one million today, thanks to a collapse in demand, increased production outside the Gulf, and the remarkable adaptability of the global logistics system.

I largely agree with this assessment.

Nevertheless, I believe that the real turning point lies at another level.

Goldman essentially continues to reason in terms of the balance between supply and demand. In my view, the decisive factor is now the resilience of the system itself. Strategic reserves continue to be tapped. Commercial inventories are still absorbing part of the shock. Chinese imports are slowing. Trade flows are being reorganized. Shipping routes are shifting. All of these adjustments are indeed working. But each one also reduces the safety margins that, until now, had made it possible to absorb disruptions without major consequences for the rest of the economy.

To understand this phenomenon, let’s imagine a river.

The authorities continue to open the reservoir’s floodgates so that residents continue to receive water. The faucets are working normally, and everyone concludes that the situation remains under control. Yet the river has never returned to its original flow rate. The system is still functioning, but only because it is drawing on reserves that cannot be depleted indefinitely. The oil market today finds itself in a comparable situation. Investors continue to watch the reservoir level; the physical market is already beginning to watch the river’s flow.

This development now extends far beyond the energy market alone.

The real yield on 30-year U.S. Treasury bonds has just reached its highest level since the 2008 financial crisis:

Investors are now demanding a real rate of return — something they hadn’t asked for in nearly twenty years — to finance U.S. debt. At the same time, Japan has just recorded the sharpest monthly decline in its foreign exchange reserves in its history, after mobilizing nearly $100 billion in a single month to prop up the yen.

Since May, these interventions have already totaled $174 billion, financed primarily through sales of U.S. Treasuries. In the United States, the Treasury is following a similar approach by rolling out a series of measures designed to prevent another spike in long-term rates, while Scott Bessent sums up this new doctrine with a phrase that has become famous: “I am the house now.”

Scott Bessent’s statement likely went unnoticed by the general public. Yet it deserves special attention.

By declaring, “I am the house now,” and then adding, “you can bet against me if you want,” the U.S. Treasury Secretary did more than simply defend his administration’s exchange rate policy. He sent a much broader message to the financial markets.

For decades, investors have assumed that economic authorities were essentially content to set the general framework for monetary and fiscal policy, leaving it to the markets to determine asset prices. Scott Bessent, on the other hand, asserts that the U.S. Treasury has now itself become a direct market participant. When it intervenes in the yen market, he explains, it does not speculate like an ordinary investor: it acts with privileged knowledge of the intentions of the Japanese government, the Bank of Japan, and monetary authorities. In other words, it believes it has information that the market does not yet possess and implicitly urges investors not to underestimate the ability of governments to influence asset prices.

This statement likely marks a shift in philosophy. The authorities are no longer seeking merely to regulate the markets; they are now openly acknowledging their willingness to intervene directly when they deem financial stability to be at risk. Following the yen interventions, the use of the FIMA Repo to prevent massive sales of Treasuries, and the various measures designed to preserve favorable financial conditions, this sentence perfectly sums up the ongoing shift: The U.S. Treasury no longer presents itself as a mere referee of the game, but as the casino’s bank, ready to use the tools at its disposal to prevent a localized strain from escalating into a systemic crisis.

This development is likely one of the best indicators of the regime shift we have been describing for several weeks. As physical, budgetary, and financial constraints mount, the authorities seem to believe they have no choice but to take direct action to preserve the stability of the system. This is precisely what Scott Bessent’s phrase sums up in a few words: “I am the house now.”

These interventions are therefore not isolated events. On the contrary, they reflect a profound shift in economic policy. The authorities are no longer seeking merely to manage the business cycle; they are now attempting to preserve a system in which physical, financial, and fiscal constraints are beginning to reinforce one another. The longer oil prices remain high, the more inflation expectations rise. The more expected inflation rises, the higher the returns investors demand to finance government deficits. And the higher those returns climb, the more central banks and treasury departments are forced to act to prevent bond market tensions from spreading throughout the entire financial system.

The first effects are now becoming visible in the real economy. After nearly two years during which wages rose faster than prices, real wages in the United States are beginning to decline again.

Households are seeing their purchasing power erode just as the cost of capital is returning to its highest levels in nearly twenty years. We are thus seeing the first signs of an environment that the markets had almost forgotten: slowing growth amid persistent inflationary pressures, persistently high interest rates despite weakening economic activity, and governments forced to intervene more and more to prevent these various imbalances from reinforcing one another.

In my view, the real shift in the economic landscape therefore lies not solely in oil prices returning to around $100. It stems from the fact that the cost of maintaining the global system’s equilibrium is now rising faster than its capacity to absorb these imbalances. It is likely this dynamic — far more than the daily fluctuations in Brent crude — that will be the true driver of the markets over the coming quarters.

This trend is bringing us closer to a stagflationary environment. Physical constraints continue to drive up production costs at the very moment when financial conditions are tightening, real wages are beginning to contract again, and central banks have less and less room to maneuver. This is precisely the scenario we anticipated as early as April, when we explained that the return of stagflation could mark a genuine shift in the macroeconomic regime over the coming years.

In this context, traditional financial assets find themselves caught in a vise between slowing growth and persistent inflation, while gold naturally regains its monetary function. It is likely no coincidence that the yellow metal continues to outperform even as U.S. real interest rates have just reached their highest level since 2008.

We may be witnessing the return of a macroeconomic regime in which gold is no longer merely a hedge against inflation, but one of the few assets capable of simultaneously protecting against monetary deterioration, sovereign risk, and the weakening of the financial system.