The Oil Blockade Isn’t Spooking Markets — Yet

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Who gets to be in charge of technology? If you believe that crypto or AI or any other technology is going to fundamentally change the way that we live our lives, who gets to be in charge turns out to matter a lot? In this week on the Vergecast, we're talking about stories about Satoshi Nakamoto, the creator of Bitcoin, Sam Altman, the CEO of OpenAI, and even how the European government changed the way that your web browser looks every day. All that on the Vergecast, wherever you get

“podcasts. Today's number $1.2 trillion. That's how many dollars the US government racked up in”

deficit spending in the first half of this fiscal year on track for more than $2 trillion for the

full year. That is a roughly 20% increase from the previous year. Thank God for fiscal conservatism. Building your house. Welcome to PropG markets. I'm Ed Ellson. It is April 14. Let's check in on yesterday's market vitals. The major indices climbed on hopes of a deal with Iran. Meanwhile, oil prices rose as the US moved to blockade the straight of Hormuz. We'll talk about that in a second. The yield on tenure treasury fell and finally Oracle shares surged nearly 13% after the company

revealed new AI tools for the utility sector. That gained lead software stocks higher with broader

sentiment turning positive to start the week. Okay, what's happening? The US Navy has blockaded

the straight of Hormuz. The blockade went into effect yesterday morning after peace talks in Pakistan collapsed this weekend and opposed on truth. Social Trump threatened to quote "illiminate any Iranian ships that come near the blockade." Oil jumped nearly 8% on the news climbing back above $100 per barrel. By the afternoon Trump said Iran had reached out about negotiations and oil prices paired some gains. This latest travel at the straight follows a hot inflation report

back in the states where the price of oil has already pushed gas prices higher. So here to discuss what this blockade means, what these latest developments in Iran mean. We are speaking with Michael Gapin, managing director and chief US economist at Morgan Stanley. Michael, we have the blockade on the blockade and it's a little hard to understand however on fields about it because we do have oil prices obviously rising but then also we have stock prices rising. I mean investors seem to be

somewhat bullish in a lot of ways coming into the week. What do you make of this blockade? What

“does it actually mean for investors? Well, you're right that I think investors, I don't want to”

use the word complacent because certainly they're not complacent but I think they're optimistic in the sense that the interpretation of markets is that the day-to-day events here are probably still what they would call in a de-escalation kit. Meaning it doesn't appear like things are escalating in a way so oil is staying around this $100 per barrel level that certainly a lot higher than it was going into it. But the view from the market is $100 oil made up great but it's something the US economy

can withstand in the global economy can withstand as well. So it's inflation's rising yes that will crimp purchasing power we can we can talk about that but it does not appear in that oil is at a level

large increase in oil it initially shows up inflation but if it rises too much then what it starts

to do is weaken activity and I think the market is telling you we're in that first stage we're in

that first part it's likely an inflation story and made dampened demand but it should the global

“economy should remain in an expansion in 2026 and that's why things stocks have rebounded.”

What do you make of the inflation report that we saw as well for March came in at 3.3% to year high gasoline up over 20% in a single month. I mean that inflation report was pretty bad but of course it is measuring the immediate effects of the war in Iran. I mean as the US economy is over at Morgan Stanley like what are you supposed to do with that data is that meaningful in your long-term projections of how things are going to go. It's certainly meaningful for where we think

headline inflation is going right so we typically split out headline and core core is X energy and X food because these are commodities determined in global markets and core kind of gives us a view of where underlying inflation trends may be going. In the data history in the US me this goes back 30 to 40 years now where shocks to oil tend to push headline inflation higher in the US

“but it often has very limited second round effects on core that's important from the”

economist point of view because you're saying okay we get the direct effect for energy we can't avoid that it goes right into gasoline prices very quickly in the US but the good news is history says

we don't get second round effects where other prices rise because gasoline prices are higher or

oil prices are higher so we've raised our forecast for headline inflation we actually think headline inflation will peak around 3.7% on a year on your basis so there's still probably a little more to come in that regard but we really haven't changed our outlook on core inflation within cornflation can actually move a little lower as we get into the second half of the year that will be dependent though I think primarily on whether the tariff passed through to goods prices and we think

“it will buy the middle of the year but that's how we're looking at it it's a it's a boost to headline”

inflation but it may not change the underlying dynamics of inflation and inflation could be lower by the end of the year. Walk me through that thesis then because my understanding is I mean yes we see the obviously immediate impacts of oil prices on gasoline but we also know that what's what's happening if there's if the straight-of-home loses is blockaded further then I mean fertilizer prices will go up you need fertilizer to grow food which would mean food prices will go up in addition

you know you need gasoline to transport things around the country to move stuff from countries to other countries I mean mine is that pretty much the whole economy is dependent on oil in one way or another so how would it not pass through to cornflation the things like food groceries consumer goods etc. Well two things one is higher oil prices tend to weaken activity right so gasoline prices go up you and I pay more for prices at at the pump we can't spend it elsewhere so demand in the economy

actually slows and it's that softening and demand and that softening and activity which means other prices don't tend to go up. Now this is just what history suggests is the guide it may not be the case this time around inflation the US has been above its 2% target for about five years and you make good points about let's say the downstreaming of oil into other distalits and products and like for example food costs do involve a lot of transportation so it's conceivable maybe we do

get some second round effects this time so history says we won't but we can't be too

blassey about it and and we may get it the other point I'd like to follow up on that it's a good point you make is right now we're still largely talking about this as the effect of higher oil prices what you're getting at with with the closure the potential long-term closure of the straight is well at some point this may turn into a quantity story right now I might be able to get as much oil as I need at a higher price what happens if it's not available at any price

during COVID where that's going to show up first is an Asia because I think as you know about 85

“percent of the oil that comes out of the straight of hormones its destination is Asia so if some”

economies are going to experience outright shortages first it will be there and then you're talking about I can't get the oil or as you say the fertilizer or the distillate that that I need therefore activity has to stop so those are the risks we could get second round effects on inflation because we've been above target for for so long or this this conflict could go on long enough where it actually it changes from price effects to to quantity effects then you're right

we could see a much more persistent inflation story right it is really interesting just an

and kind of depressing almost that when you look through history basically what you're describing

is that when oil prices rise the reason that everything else doesn't rise is because people are so strapped for cash that you literally can't test them not that much further either way the situation is you're testing the American consumer literally to their limit and if you hit that limit then there is a world in which companies will basically say okay well we can't raise our prices fairly because they're just not going to pay for this it does get into sort of

“murky territory I think when we think about things like food where it's like well you got to”

pay for food but I mean it's just striking that we are getting to that point just from an investment perspective I mean the way this story has changed is getting almost comical like we start with we're only going to be in in Iran for four or five weeks then we say actually we're going to increase that and we're going to create a deadline and then we get to the deadline and we say we're going to escalate this and then we say actually no we're not escalating it now we have a deal and then we

say actually wait no the deal didn't really work because now that now more bombs are being dropped and so now we're going to they're going to blockade the things so we don't have a deal now we're going to blockade in response I mean in a funny way nothing is really happening here and yet every time something happens the market is reacting and saying okay something's changed now we have a blockade now we don't have a blockade now oil is going to is going to pass through fine and to me I'm

sort of like shouldn't we just not even be reacting at all what is the the the the correct response to what we're saying you laid it out very well I would I would argue that markets are reacting a little less to the headlines now than they were two to three to four weeks ago so as you said in your introduction oil was up around eight nine ten percent today in response to the implementation of of the blockade but your equity markets did okay today right so I do think the market is

discounting a little bit the headline noise looking through some of the day-to-day volatility in a way that it did not do it a few weeks ago so I agree with you that you can be very disconcerting

“to your headlines one way one day and in the other way the next day but I think the markets”

actually starting to filter that out better and volatility has has come down I think a second

factor behind that is markets had to de-risk for the first two to three to four weeks of this right most investors were positioned for rates to fall at least at the front end of yield curves all throughout the throughout most of the world not all the world much of the world and with this oil price shock did of course was push yields higher so markets needed to to rebalance and and de-risk and get out of positions and kind of get flat or neutral as we would we would

call it that process leads to a lot of initial volatility but now that positions have been squared to use the terminology of of the industry and risk is a little more neutral now markets can afford to look through some of this headline noise yeah I mean we've seen how investors are reacting you know as an economist it's almost it's a slightly different job because you're not necessarily trying to make a bet on what's going to happen you're just trying to

understand what are the possible potential scenarios what are the possible futures I guess as an economist what I mean when you put your economists hat on how seriously have you taken these developments in terms of their potential to I guess adjust the trajectory of the U.S. economy like when you see the headlines and you see okay now he's blockaded the blockade do you look at that and then say okay well this is going to change the economy in this way or this isn't

the way that we've approached it is to kind of think of the world in through three lenders three

“three possible paths here one one is kind of the everything goes back to normal and we return to”

February 27 we think that's very unlikely we think there has been a structural regime shift in the balance of power in the middle east and the way oil flows in and out of the straight so we're we're not here thinking hey if we just get over this or that things are going to go back to where they were six to eight weeks ago so that leaves us kind of two possible outcomes obviously there's more than two but in terms of trying to think about how things may make go and one is what

I'll call the oils high but not too high and then the second one is oil moves so high as to create

recessionary kind of outcome so there's a there's a non-linearity here where above a certain price oil becomes really problematic for the US expansion and the global expansion below that level it's kind of what I was saying before it's about a spike in headline inflation it's the presses demand a little bit in the US but the US economy continues to to go and the expansion continues right after all week we had about a hundred and twenty dollar per barrel oil at the beginning

of the Russia Ukraine conflict I was a slightly different US economy at that point in time a lot of fiscal stimulus in the economy a lot of jobs being added but you know this price level of oil is not unusual so we have passed it through the lens of essentially saying well the average consumer about two and a half percent of their spending goes to to gasoline right lower middle income households more like four to five percent but double the average and so what it's really doing

is that shock that hit to real disposable income and real purchasing power is basically offsetting

the fiscal stimulus that we assume from the one big beautiful bill act so in some of our prior conversations you know before the Iran conflict started we were talking about how optimistic the outlook was for the US this year right we've trimmed the sales on that from growth rates that could be above two and a half percent closer to three percent maybe and thinking well this is just going to offset that fiscal stimulus maybe it's another year of growth around

around two percent but you're getting inflation moving higher maybe we get the Fed cuts that we were expecting maybe we don't maybe the Fed stays on the sign line so right now we're saying it's a headwind but we need to be watchful as we were saying that maybe it becomes a quantity story maybe

“it does re-escalate maybe oil moves to 125 to 150 dollars a barrel and then I think equity markets”

would look much weaker sentiment would be worse and in addition to weaker spending maybe what you get then is negative wealth effects and the private sector that says well let's delay that capital spending plan let's delay those hiring plans right I'm and then the economy can slow down much more abruptly all right Michael Gapen managing director and chief US economist at Morgan Stanley

Michael always appreciate your time thank you thank you after the break we look at anthropics

cyber security threat and if you're enjoying the show please follow our new profti markets youtube channel for link is in the description this is advertiser content brought to you by version of land again a couple weeks back I got you a birthday gift not to pet myself on the back but it was a pretty good one it was indeed you surprised me with virgin lantic upperclass tickets to London so tell us all about it it was pretty incredible from the moment I entered that upperclass cabin I have

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we're back with proftry markets andthropic announced it's most powerful model yet last week

and decided the world isn't ready for it the model called clawed mythos found thousands of previously undetected software bugs and identified security vulnerabilities in every major operating system and web browser instead of a public launch anthropic is limiting access to a group of the world's biggest tech companies including the company's major competitors the consortium known as project gloss wing will use mythos to find and patch vulnerabilities before bad actors do so

how powerful is this model really and what does it mean for cyber security in the future joining us to discuss this was speaking with Teresa Peyton CEO of fortillus solutions and former White House Chief Information Officer Teresa I mean this model regardless of what we even know about it has just totally shaken everyone's confidence and it was very scary that they basically got together and said

we're not even going to release the product because it's that powerful what do we know about this

model and what do you take away from the announcement of clawed mythos? Sure absolutely you know

“thanks for having me and this is a very important topic for a couple of reasons one”

I know there is sort of a camp that says well maybe this is a marketing play or maybe they're overplaying their hand on this and it's not as bad as we think and and for all intents and purposes they're allowed to say that for now until we have a third party point of view because this is self-reported by inthropic however inthropic at their ethos talks about having an ethical constitution and they've brought in a lot of experts from the outside to talk about safety and ethics and

security and reliability so let's assume the self-reporting is accurate for right now until we know more if it is accurate that means that mythos as a frontier AI is actually the smartest AI on the planet right now and if it is true based on their self-reports it's going to be the best and the worst nightmare for cybersecurity teams everywhere. I'm going to quote somebody on my team who said I won't say the name a bomb just went off in the cybersecurity industry and we all

need to read everything we can about it to understand how it can help us and how it can be used against us. What do you make of how the markets have been reacting because I mean if we look at what happened last week mythos has announced and it did look like a bomb went off I mean some of the biggest names absolutely plummeting then we come into the beginning of the week and people seem a little bit less concerned some of these big names crowd strike was up Palo Alto networks went up cloud

flow went up like a lot of the big cybersecurity names are actually rallying now what changed in the minds of investors do you think? Well I mean I mean they did have a weekend to to think about that process yeah I mean it's interesting I mean there is strategic positioning around what day the week you deliver bad news and so people are the weekend maybe to think about it but also just say you know what let's learn more so there's this consortium coming together with the

anthropic and we're gonna hear more but again if the self reporting is true that means that mythos in a limited release found thousands of very serious bugs including zero days they said some of them

product that has been installed did not find these and so we have to ask the question what does that

“mean for today's cybersecurity products and are they gonna have to completely reimagine the”

design of these products with the tool like mythos now also what if somebody else is built a tool like mythos but they don't have the ethical kind of foundational elements that anthropic has committed themselves to that should also be a huge concern right now because there could be a hidden mythos that none of us is aware of that is ready to launch what are you supposed to do then as someone who works inside the security like what are you supposed to do with this information

I mean clearly it's a bad idea to just write it off and say oh no it's all just marketing it's not real it's not serious but then on the other hand I mean how do you accept your fate like

well like are you just accepting fate if it's just this is just infinitely more powerful than

all of the solutions that we've had in the past and this is going to completely destroy the industry as we know it or at least completely disrupt the industry as we know it like what do you do if you're working inside the security and you see this should you really be I mean how how do you process it how do you even change your behavior is moving forward think this opens up a new door you know the way I like to think about this you know I use to

live in Hawaii and so when the tsunami bell goes off you don't say oh gosh this is it this is when we're all gone you go to higher ground right and so and you know the plan and you get the playbook out and you hear the bell you hear the warning you find out in the midshot me have and you execute against that plan and so this should be our tsunami bell warning

“whatever you were planning on doing you need to operate at machine speed and not at bureaucratic”

speed so a couple of things because I don't want people to not feel empowered and engage on what to do here so if you're an executive listening to our conversation right now couple of things you need to be doing you need to be asking your vendors and your CSO right now

how are we systematically testing our critical software our open source dependencies

our cloud infrastructure against AI augmented vulnerability discovery because mythos will eventually be commercially available but somebody else may make it available and it won't be in the good guys hands it'll be in the bad guys hands ask whether or not because of the vendor relationships you already have do you have access to get intel for what they're learning as they continue to run the tool and then also be asking your board and your risk committees if they are getting regular

quantified updates on the exposure that the company has due to sort of this dual-use AI risk a frontier model is being used against you instead of on your behalf. I would say for the security teams a lot of the things you already had on your roadmap that you just have an edit chance to get to because the the enterprise you work for hasn't prioritized it or put money against it doors now open for you to go back in and have that conversation to say we have to operate at

machine speed because that's going to be what's coming at us. What do you make of this the fact that treasury secretary Scott Benson actually gathered all of the big bank CEOs at the White House to talk about what this would mean and to talk about the cyber security threat yeah I mean that was a moment where it's like okay this is this is real this is very scary we're literally trying to figure out how to regulate this thing or I don't know what the conversation

even was I mean what do you think was said in that room what should have been said what do you make of the fact that that happened yeah I mean so my understand many of them were already there for another reason for another conversation but this is fairly unprecedented to have this kind of a meeting called potentially on this topic we don't there's no minutes of the meeting we don't know what was discussed but the fact that they got together at this level and

had a conversation should give everybody sort of pause one we know that the way the world moves around is money has to move around and so obviously there's concern about some type of an attack that could either stop money from moving or make sure that money moves to the wrong places and not

“to the right places and remember money does now move at the speed of machine so how are we”

protecting at the speed of machine that probably was a big part of the conversation and making sure that people really understood this is your top priority what do you think this will ultimately

mean for AI policy because it seems as though if this is as powerful and disruptive as anthropic

literally destroy our digital economy if it can just hack everything if it can hack every major bank

which makes me think okay well then the government will just say no this you you can't release this product it's illegal and what do you think will actually happen here from a regulatory perspective and you know someone who actually worked in the White House what do you think or some of the the correct pods forward what should we do about this this is a very tough decision for policy makers and I feel for them you can't hold this product back and the reason why I say that is is

somebody else is developing the same thing it's sort of the equivalent of saying don't build up you know whether it's a military for kinetic perspective because we wouldn't want to have a military

because that could create you know sort of unsafe posture well but if somebody else is building a military

“you need to at least you know kind of have that perspective so it's the same thing with something”

like this you don't want to say you can't release this tool because it's dangerous well it's dangerous not to have this tool now that we know that we have it because cyber criminals and kids in nation states if they weren't already building one they just literally read the headline and they're building one and so what you have to do is figure out how can you take a tool like this make it commercially available so it is a force for good that it has the right governance and guard

rails around it so it doesn't end up in bad hands but you know just like a hammer can help build a

house a hammer can also be used as a weapon so you can't blame the tool you have to have the right

policy and you have to have the right governance something we are sorely lacking right now yeah all right Theresa Payton, CEO of Forceless Solutions Formula White House Chief Information Officer Theresa very interesting times thank you for joining us thanks for having me here's a fun fact to end the show today ever since we invaded Iran google search interest for Epstein has fallen 75% many of theorize that the real reason we invaded Iran wasn't to destroy

that nuclear capabilities which according to the present had already been destroyed but rather it was

“to distract our attention away from the Epstein files personally I think that that theory is a little”

far-fetched but if it's true well then you would have to admit it's kind of working but there is something implicitly puzzling about this theory and about every theory of distraction that we keep hearing about for that matter and that is the following since when did prosecuting a crime in America become dependent on our attention I mean if a guy robbed a back for example and we knew he robbed a back would that not be enough as it is to just bring him to court I mean would it even matter

if regular Americans knew about the crime and talked about the crime if the crime would discuss on TV no all of that would be irrelevant because again it's not about how much attention we pay to the crime it's about whether or not the guy committed a crime our opinion doesn't matter and yet

“we seem to no longer live in that world we seem to live in a world where prosecution is no longer”

the responsibility of law enforcement but it seems we believe that prosecution is the responsibility of citizens and it's not just Epstein I mean consider all of the insider trading scandals we've discussed as it relates to the Iran war the billions of dollars of oil futures that were traded just minutes before Trump made major announcements related to Iran or the millions of dollars that Trump's children made timing their investments in crypto timing their investments in defense companies

and drone startups in accordance with the president's actions and somehow we all believe that it's on us to identify these crimes and to examine the evidence and keep track of the trades and of course to not get distracted by other things why is that why isn't that the job of the cops well this strikes at the heart of one of the most fundamental changes we're witnessing in this administration and that is despite being tough on crime as they often say what we're seeing is

that law enforcement is actually being systematically dismantled right before our very eyes and we're seeing this across multiple different agencies the SEC for example whose literal job is to investigate financial crime they have seen their staffing numbers drop by nearly 20% in just one year under Trump and as a result the SEC's enforcement actions have fallen roughly 30% that is one of the

billion dollars worth of DOJ crime prevention programs and in addition white collar crime

“prosecutions have been cut in half the same is also true of the IRS this is the agency whose job”

is to find and prevent tax evasion to prevent tax crimes their workforce has been cut by roughly a third since the previous administration and audit rates which already declined 9% last year

are on track to decline another 39% this year and this is before the additional funding cuts

“that are planned for next year so put another way despite all the rhetoric Trump and his team are”

actually defunding the police they're actually attacking and dismantling the mandate of law and order and they are especially doing it in the department of white collar crime and of high finance so when I ask myself why do we suddenly think it's our job to investigate criminals and to

figure out financial crimes and to hold it all to account the answer is quite simple because

it now is yes law enforcement still exists but as I hope the numbers show we are witnessing a systematic and growing neglect by those organizations to actually enforce the law and it's all coming from the top down now I know what you're probably thinking this is a market show aren't we supposed to be talking about markets yes it is a market show and yes I agree but the fundamental underpinning of any market system is that there are rules there are laws of the game

“that you have to follow but if those laws don't exist anymore or if the referees whose job is to”

enforce those laws don't exist anymore as we are increasingly seeing well then we should start to recognize how the game of investing is fundamentally changing I'm more importantly how we might be witnessing the arrival of an entirely different game okay that's it for today this episode is produced by Claire Miller and Alison Weiss edited by Joel Passen and engineered by Benchney Spencer a video editor is Brad Williams a research team is Daniel on Isabella Kinsel Kristen O'Donuch

you and Mia Souverio and our social producer is Jake McPherson thanks for listening to prof. markets from prof. media if you liked what you heard give us a follow I'm Alison I will see you tomorrow