Inflation Beyond Hormuz And, In the Meantime, Headline Whiplash

A break in our weekend festivities allowed me to finish up this week's macro commentary and get it to you on time after all... So here you go:

Regular readers will note my persistent (redundant, if you will) inflation commentary -- per your weekly rundown below... This is by design, for, at this juncture, I see the mainstream narrative (which is of course finding recent support as the oil price abates) around go-forward inflation to be rooted in a framework that simply doesn't express the populist-inspired-policy world we've morphed into, nor the related/attendant fiscal constraints, particularly in the US... So much so that it bears repeating, virtually ad nauseam!

As stated*:

"Here's where I'd gently push back on the conventional take. The standard story says energy spike fades, inflation cools, the central bank cuts, all clear. I don't think it's that simple — and the reason has very little to do with the strait.

My view is that inflation is likely to prove structurally stickier than traditional models suggest, for reasons rooted in fiscal and political reality rather than any single shock. We're carrying federal debt north of 120% of GDP that must be continually refinanced, alongside a deficit in the neighborhood of 6% of output that has to be financed every year. Spending of that magnitude is, in itself, a net contributor to inflation. Add a political environment — across both parties — with little appetite for austerity and a strong incentive to keep financial markets supported, and you get a setting that leans inflationary as a baseline condition, not as a passing episode.

That's the distinction I want clients to sit with. The energy relief, to whatever degree it holds, is real and helpful — but it works on the cyclical surface. The forces I just described work underneath, and they don't resolve when a tanker sails through a strait. So even in a world where oil behaves, I'd expect inflation to settle at a higher, more persistent level than the pre-2020 norm most of us got used to. That's a regime, not a blip — and it's the part of the picture this week's whipsaw doesn't touch."

Our PWA Index overall score continues to improve, aided last week by a notable (and expected, despite the above) improvement in the inflation inputs.

Here's the scoring summary followed by your weekly rundown*:

The Headlines Will Whipsaw — The Regime Won't

Over the past several days the news around the Middle East has moved fast enough to give anyone whiplash. An interim agreement was signed. Oil fell hard. Then over the weekend Iran declared the key shipping lane "closed" again — even as ships kept moving through it and a fresh round of talks got underway. If you tried to trade each headline, you'd have spun in circles. I'd rather step back and separate what's genuinely changing from what's just noise, because the distinction is the whole point.

Our internal conditions gauge improved for a fifth straight week, and the trend is real. But the more useful message this week is about what kind of improvement it is — cyclical relief on the surface, sitting on top of a structural backdrop that hasn't changed at all.

What's actually happening with oil

The waterway at the center of this is the Strait of Hormuz, through which roughly a fifth of the world's seaborne oil normally passes. Here's the sequence that matters. Late last week, tankers carrying stranded crude began moving through it again, the U.S. lifted its blockade, and a major Gulf producer signaled it would raise output. Oil fell sharply — Brent dropped to around $80 and crude logged its worst week in some time, giving back most of the premium built up during the conflict.

Over the weekend the politics got loud. Iran's military declared the strait closed again, citing fighting in Lebanon. But two things cut the other way, and they're what I'd actually weigh. First, the ships kept moving — by the U.S. military's count, a record volume of oil transited the strait over the weekend, and there were no attacks on vessels for two consecutive nights. Second, the parties sat back down to talk, and a separate ceasefire was reached in Lebanon, which removes the reason Iran had given for the disruption in the first place. The durable peace still isn't signed, a 60-day clock is running, and real questions remain. But the physical reality — oil moving — has so far held up better than the rhetoric around it.

The honest read: this is de-escalating, unevenly, with plenty of room left for headlines that jolt the price in either direction on any given morning. That's worth watching. It is not, in my view, the thing that determines where inflation settles over the next few years.

Why the inflation story runs deeper than a shipping lane

Here's where I'd gently push back on the conventional take. The standard story says energy spike fades, inflation cools, the central bank cuts, all clear. I don't think it's that simple — and the reason has very little to do with the strait.

My view is that inflation is likely to prove structurally stickier than traditional models suggest, for reasons rooted in fiscal and political reality rather than any single shock. We're carrying federal debt north of 120% of GDP that must be continually refinanced, alongside a deficit in the neighborhood of 6% of output that has to be financed every year. Spending of that magnitude is, in itself, a net contributor to inflation. Add a political environment — across both parties — with little appetite for austerity and a strong incentive to keep financial markets supported, and you get a setting that leans inflationary as a baseline condition, not as a passing episode.

That's the distinction I want clients to sit with. The energy relief, to whatever degree it holds, is real and helpful — but it works on the cyclical surface. The forces I just described work underneath, and they don't resolve when a tanker sails through a strait. So even in a world where oil behaves, I'd expect inflation to settle at a higher, more persistent level than the pre-2020 norm most of us got used to. That's a regime, not a blip — and it's the part of the picture this week's whipsaw doesn't touch.

How we read the Fed in that light

The Federal Reserve held interest rates steady this week — the first meeting under new Chair Kevin Warsh — and its updated projections leaned against rate cuts for this year. On the surface that reads firm, and markets took it that way: short-term rates jumped, longer-term borrowing costs rose, and stocks gave back ground.

I'd offer a more measured interpretation. A couple of things stand out. The Chair declined to attach his own projection to the Fed's rate path — a notable choice that leaves him uncommitted rather than locked in — and he emphasized wanting to see more data while stepping back from offering specific forward guidance. Read constructively, that's a central bank preserving flexibility rather than one determined to keep tightening. It's consistent with a Fed that wants more information in hand and is keeping the door open to holding steady should the data allow. I wouldn't over-read a single set of projections as a firm commitment to higher rates.

What it means for how we're positioned

Put the threads together and you get the throughline of how we're invested. If inflation proves structurally stickier than consensus expects, and if the central bank is inclined toward patience rather than aggression, then real assets and inflation-aware exposure aren't a hedge against some tail risk — they're a core response to the base case. That's why the portfolios carry the real-asset and inflation-sensitive tilts they do, with enough balance to ride out the near-term swings that weekends like this one will keep producing.

None of this calls for dramatic action. It calls for staying anchored to a structural view while the cyclical noise — oil up, oil down, strait open, strait closed — plays out week to week. The conditions gauge improving is a genuine positive, and I'm glad to see it. But the deeper story, the one that actually drives long-term outcomes, is the fiscal and monetary regime we're operating in. That's what we're building around, and that's what the headlines, however dramatic, don't change.

This note is for informational purposes and is not a solicitation to buy or sell any security. Past performance is not indicative of future results. 

*Prepared by Marty Mazorra, Chief Investment Officer, Private Wealth Advisors. Research synthesis and drafting assisted by AI tools under advisor review. All market views, analysis, and recommendations are those of the advisor.