The Market Is Pricing The Wrong Risk

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Oil is rising again.

Inflation remains sticky.

The dollar is strengthening.

And the market is pricing the possibility of Fed hikes.

That sounds like a bad setup for risk assets.

But in my latest conversation with Griffin from Deer Point Macro, a different picture emerged.

The oil shock may be less severe than the headlines suggest.

The market may be more hawkish than the Fed itself.

And a stronger dollar may reflect capital moving into US assets, rather than investors running away from risk.

Let me break down the signal from our conversation and how we at LNMS see things.

• Why oil has not exploded despite geopolitical escalation

• Why inflation may remain sticky without forcing another Fed hike

• What the rates market is currently pricing

• Why a stronger dollar does not have to hurt US equities

• How foreign capital keeps flowing back into America

• How to diversify away from a potential AI unwind

• How to figure out the current macro situation

Most investors are asking:

“How high can oil go?”

A better question:

“What risk is the market already pricing?”

Markets do not move on headlines alone.

They move on the gap between expectations and reality.

Oil can rise without causing another inflation crisis.

The Fed can remain hawkish without actually raising rates.

The dollar can strengthen without crushing risk assets.

Let us explain.

Signal #1: The Oil Shock Has Been Less Powerful Than Expected

As the war erupted, calls for oil at $150 or even $200 came loud.

But the price response remained relatively contained.

Why?

Griffin points to three reasons.

• First, the oil market entered the conflict with significant excess supply.

• Second, the marginal cost of production remains far below the most extreme price forecasts.

• Third, geopolitical risk premiums usually fade unless physical supply is removed for a sustained period.

That last point matters.

The number of ships moving through the Strait of Hormuz does not tell the full story.

The type of ship matters.

A small number of very large crude carriers can still transport millions of barrels.

At the same time, demand may be weakening.

China has sharply reduced oil imports from several major suppliers.

It also cut imports from countries that are not directly affected by the conflict.

That suggests the market is not facing a simple supply shock.

Demand is adjusting too.

Check out our latest «No More Information Overload” Report on exactly this topic.

Signal #2: Inflation Can Stay Sticky Without Forcing A Hike

Oil still matters for inflation.

But Griffin does not expect energy to remain the dominant driver.

Much of the initial impact has already passed through.

Other components may prove more persistent.

Housing inflation is cooling.

But computers, equipment and other AI related inputs remain expensive.

The AI buildout is creating bottlenecks.

That keeps parts of inflation elevated even if oil stabilizes.

Griffin does not expect inflation to return sustainably to two percent this year.

But that does not automatically mean the Fed has to raise rates again.

The Fed can simply wait.

The US economy has absorbed higher rates better than many other developed economies.

A major reason is mortgage structure.

Many American households locked in low fixed rates for 30 years.

Their interest burden did not immediately rise when the Fed tightened.

Signal #3: A Stronger Dollar Is Not Automatically Bearish

The simple macro playbook says:

Dollar up.

Risk assets down.

But that relationship depends on why the dollar is rising.

A stronger dollar caused by global panic is usually negative.

Investors sell risky assets and rush into cash.

That is not necessarily what Griffin sees today.

Instead, capital is flowing back into the United States.

Europe runs large trade surpluses.

Countries such as Germany export more than they consume domestically.

Those export earnings need to be invested somewhere.

The US offers:

• Deep capital markets.

• Highly liquid government bonds.

• Stronger economic growth.

• An equity market near record highs.

All of this creates a recurring loop.

As other parts of the world export goods, the US absorbs capital through its financial markets.

The result can be a stronger dollar and stronger US assets at the same time.

One core message we landed on during the episode with Griffin from Deer Point Macro is the fact that the market is taking the inflation threat seriously.

Possibly too seriously.

Options markets now show greater demand for protection against rising rates than falling rates.

Investors are paying up for the risk that the Fed hikes again.

This is unusual.

Griffin believes the probability of another hike is lower than current market pricing suggests.

His rough assessment:

The Fed is more likely to stay on hold than raise rates.

That creates a potential mispricing.

The short end of the yield curve has sold off sharply as investors price a more aggressive Fed.

But the long end has moved less.

That has flattened the curve.

Griffin therefore sees more attractive opportunities further out on the curve, where positions are less sensitive to every change in short term Fed expectations.

The key signal: The Fed may be hawkish.

But the market may be even more hawkish. That creates the opportunity.

If you are worried about the AI trade possibly unwinding any time soon, Griffin’s has some practical advice for you:

Know what you own.

Many investors think they are diversified because they own a broad US index.

But if hundreds of companies share the same AI factor, the diversification may be weaker than it looks.

One alternative is exposure to economies that remain tied to the real economy:

• Manufacturing

• Exports

• Industrial production

• Commodities

Griffin highlighted markets such as:

• Indonesia

• Vietnam

• Mexico

• Brazil

These economies are not isolated from global technology.

But they are less dependent on AI valuations.

They may also benefit from demand for copper, lithium and other materials required for electrification and semiconductor production.

The goal is not to abandon the US.

It is to avoid owning the same macro bet in every position.

(We’ll soon publish a “No More Information Overload” report and how to think about this topic in a practical way as an investor).

As said during the interview with Deer Point Macro, this episode tried to summarize as many of the current facts as unagitatedly as possible.

For us, figuring out the macro right now starts with trying to come up with an answer regarding oil. Will crude start another, multi-week ascent?