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2020: COVID-19 pandemic, demand shock
2026: Iran war, supply shock
The decline is not because of the Iran war; the Iran war merely accelerated the downward process.
Regarding the high premiums on risk assets and the potential risks in current credit and liquidity levels, I also discussed this in February this year. At that time, the MOVE index was low, and now it has reached 112.
Intuition and some clues from the bond credit market suggest that a crisis is brewing: MOVE 112 + HY Spread 321bp (in an expanding trend) + TIPS 2.08% hitting a new high + TGA continuously rising.
The current situation is most similar to late February 2020. The difference is that the risk in 2020 was demand-driven recession, while the risk in 2026 is supply-driven stagflation. The former requires explicit easing monetary policy, while the latter is enough to restrain the Federal Reserve.
The bottom in 2026 could be very prolonged, with the turning point being the war and changes in the Fed's stance. Unlimited QE is currently unpredictable; limited, disguised easing will become a recurring trend-changing point in the market.
An L-shaped rather than V-shaped bottom is to be expected.