Trumpian Head Fakes & the Certainty of Global Recession

March 24, 2026 | In this edition of The Institutional Risk Analyst, we ponder the world of interest rates in the wake of the undeclared war with Iran and the considerable confusion in the markets about what happens next.

Unlike 2025, when a bull narrative governed market perceptions, 2026 has been a year of risk-off in terms of market exposures and concerns about rising interest rates. The selloff in the Treasury market illustrates the present concern, but notice that the two-year Treasury minus 10s bounced last week. Is the bear flattener trade already done?

The first question that needs attention is what happens when the term of Jerome Powell as chairman of the Federal Open Market Committee ends? Powell served as chair pro tempore from February 5 to May 23, 2022, following his renomination by President Joe Biden and before his subsequent confirmation by the Senate. But what happens when President Trump inevitably nominates another sitting governor to be acting Fed chairman? Economist Komal Sri-Kumar noted on Substack:

“Rather than a clean handoff to [Kevin] Warsh, the United States may now face a scenario in which the incumbent chairman refuses to leave, the designated successor cannot be confirmed, and the legal process surrounding the investigation drags on indefinitely… Complicating matters further is the possibility — reported in The Washington Post —that the White House could attempt to designate a sitting governor as temporary chairman if Warsh is not confirmed. One name mentioned is Stephen Miran, a current governor and Economic Advisor to the President, who has consistently dissented at the FOMC in favor of lower interest rates.”

Adding to the monetary mess, Stephen Miran's term as a Federal Reserve Governor was initially scheduled to end on January 31, 2026, as he was filling the remainder of a term. However, as of February 2026, he is on holdover status, allowing him to remain in his post until the replacement – Kevin Warsh – is confirmed by the Senate.  Thus there are now two holdovers on the FOMC.

While the conflicted message emanating from the central bank is not helping the financial markets, we think that our readers should look through the present noise to the likely direction of Fed policy later this year, namely lower interest rates. As with Liberation Day on April 2, 2025, we suspect that the current political mess surrounding the central bank is creating another opportunity for investors with strong constitutions. Is the concern about the Fed and inflation a another head fake c/o the financial media?

We believe that the risk-off mainstream narrative that has caused private credit sponsors like Apollo (APO), Ares (ARES) and Blackrock (BLK) to crater in the past two months, and has also caused the bond market to back up, is about to end. Notice that the common equity all of these public credit sponsors bottomed earlier this month. Is this a buying opportunity? We picked up some BLK at the opening yesterday as a wee flutter.

On Monday, President Donald Trump called off further strikes on Iran’s crumbling economic infrastructure and claimed (falsely, we suspect) that the US is talking to Iran’s leadership. The markets have responded immediately and positively, but is this another Trumpian head fake? IOHO, yes it is. We think that trading the US stock and interest rate markets based on the poorly considered outbursts from President Trump is a really bad idea.

The Threat of Global Recession

Trump’s earlier threat to attack Iran’s infrastructure was yet another gratuitous comment by the commander-in-chief. More, we doubt that Iran has any intention of talking to the US or ceasing military attacks on the Persian Gulf states. For Iran's radical leadership, there is no upside to peace. Thus the grim reality of economic dislocation caused by the war remains. How do we position for a world where key economic inputs are going to be in scarce supply?

As we noted in an earlier missive, the backwardation of forward pricing for oil continues to suggest that the interruption to crude oil supplies will be limited in duration. The more profound question, however, is how to replace the various other products made from oil, including liquefied natural gas (LNG) and key chemical flows that are a crucial input to half of the economies in the world, starting with the EU, India and China. 

While some analysts are worried about members of the FOMC raising interest rates to forestall inflation due to high oil prices, we think that an eventual cessation of hostilities in the Persian Gulf -- either through negotiation or military means -- will quickly refocus the Fed and other global central banks on the negative growth shock caused by the war.

The damage to productive capacity to produce LNG, fertilizer inputs such as ammonia, phosphate, and sulfur, and other chemicals produced in the Gulf will take months or years to resolve. We'll be addressing the issue of long-term economic dislocation next week in a special interview in The Institutional Risk Analyst.

Within a couple of months, the supplies of crucial petrochemical inputs currently on the water will be delivered and there will be nothing in the delivery pipeline after that point in time. Refined products are a far greater concern than oil. Kuwait, for example, produces a lot of aviation fuel for the EU. The Saudis are now shipping phosphates by truck to Yanbu, but this is not even a modest replacement for the disrupted supply chain in the Gulf.

What does this mean? To us, it means that the FOMC is going to quickly pivot from worries about inflation caused by a short-term hike in oil prices to a policy mixture that is focused on preventing an economic slump in the US caused by the medium-term effects of the war and the considerable damage done to Gulf oil and, in particular, chemical production capacity. While the US is a net-exporter of oil, we import many crucial chemicals from the Middle East.

We agree with Michael Green, Chief Strategist and Portfolio Manager at Simplify Asset Management, who wrote over the weekend:

“The Fed will be forced to cut. The markets may not recognize this for another 25 bps, although I am skeptical it will go that far, but they will be forced to cut… And cut with vigour… For investors who understand market structure and the U.S. structural advantage, the current despair is the setup for one of the most powerful policy-pivot rallies in years. The market is bleeding from a self-inflicted VaR wound, blinded to a bifurcated macro reality. Stay sharp. The window is wide open — but it won’t stay open forever.”

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