Diamond Head

Diamond Head Financial Advisors LLC is a Hawaii-based investment advisory founded by Steven Connell, a former partner at the Capital Group Companies.

[Diamond Head @DiamondHeadFA]

30 Days to Fix Hormuz
The fragile ceasefire in Iran can hold out for another month. That’s how long the US Strategic
Petroleum Reserve can pump out oil at its current rate until running dry.  Iranian negotiators
likely stick to their hardline position, which Trump calls “totally unacceptable,” necessitating an
invasion unless the IRGC falls before then.  If the IRGC stays intact, the US can clear the Strait in
days as it did in 1987 once the marines are sent in.   Then the current squeeze on Iran can
continue as long as it takes for the enfeebled hardline government to fall.

On July 22, 2987, Ronald Reagan unleashed Operation Earnest Will to unlock the Strait of
Hormuz from Iran’s blockade in the final stages of the Iran-Iraq war. That same day,
Supertanker Bridgton was escorted through the Strait, the first of 250 ships to be escorted
through until Iran was forced to declare a cease fire in September of the following year. This
raises the obvious question: Why doesn’t Trump release Operation Earnest Will 2 and start
escorting ships immediately?

Iran is not Trump’s only adversary. The other is Congress. The War Powers Resolution of 1973
dictates that Congressional approval must be attained for any conflict exceeding 60 days in
length. A clearing of the Strait requires ground troops—an indisputable act of war—just as
Operation Earnest Will did.

However, as of April 7, Trump still needed time to prepare for the assault on Hormuz, time that
took him outside the Congressional limit. Critical troops were not set to arrive until after the
April 30 Congressional deadline. 4200 amphibious troops from the 11 th Marine Expeditionary
Unit aboard the USS Boxer had not arrived as of late April, and 6000 troops aboard the USS
George HW Bush carrier strike group did not arrive until early May.

On April 30, Trump declared the Iran conflict had “terminated” on April 7, 2026, 40 days after
the initial attack, theoretically leaving him 20 surplus days to employ at a later date, or perhaps
leaving him the option to start a new war with a 60-day limit at some point in the future. These
challenges to the War Powers Resolution have not been tested in the courts. Indeed, judging
from Trump’s comments, he may be preparing to challenge the Constitutionality of the War
Powers Act itself.

While an extension of the ceasefire might benefit Trump’s position with Congress, there is a
powerful reason for him to end the ceasefire in 30 days and send in the marines to open the
Strait: Because there are only 30 days left in the Strategic Petroleum Reserve. Down to 200
million barrels from 430 million before the war, the reserve is being depleted at 6.6 million
barrels per day, representing about 7% of total global daily supply. If that reserve runs dry before the Strait is cleared, the price of a barrel of oil could soar to over $150. Trump, for
whom the stock market is an important measure of success, does not want this to happen.

Neither is time on the side of the IRGC tyrants, hardliners who appear to have sidelined the
civilian government. Trump’s oil blockade puts the squeeze on the payroll of 500,000 active
IRGC troops. If the blockade is removed, Trump could keep the squeeze on IRGC troops by
sending marines to take over Kharg Island and establish control over oil sales for the benefit of
the Persians a la Venezuela. Trump has also cajoled China into restricting bank lending to Iran,
money needed to pay troop salaries. Troops that do not get paid lose loyalty pretty quickly,
even at the risk of the wrath of God.

Iran reportedly has $35 billion in foreign reserves. That can pay their troops for a while
provided their leaders sacrifice the booty to which they have become accustomed. But at the
same time, there is rising desperation in the populace thanks to decades of water
mismanagement that has enriched leadership. Poorly planned reservoirs are below 10%,
aquifers have run dry, and Afghanistan upstream has substantially increased water
consumption, leaving barren land below. Iranians have resorted to trucks for transporting
water to the people, but those are running out of fuel as oil exports have ceased and wells are
being shut in. A populace that has nothing left to lose is a dangerous threat to an incumbent
government.

Will the IRGC fall within the month? Six months? Two years? Once passage through the Strait
of Hormuz is re-established, the US—and maybe even Congress—can wait it out. Time is on
Trump’s side. Time is not on the side of the IRGC.

[Diamond Head @DiamondHeadFA]

The closure of the Strait of Hormuz has so far not had the dire consequences predicted by the media.  Although a reported 20 million barrels per day was being shipped through the Strait to the outside world before the Iran war, I estimate the net reduction of shipments into the global market as a result of the war has only diminished by approximately 6% thanks to pipeline circumventions of the Strait, some oil continuing to trickle through the Strait, and the tapping of strategic reserves in the west. More details of these three factors is below.

1) Saudi Arabia built an East-West pipeline during the Iran-Iraq war which has the capacity to carry 7 million barrels per day of oil.  Before the Iran war, this pipeline was carrying only 800K BPD out of the Saudi export total of 6m BPD. Saudi Arabia can therefore divert a net 5.2m BPD of output from Hormuz to Yanbu via the East-West pipeline.  The country can also bring back online output a further 1m BPD (out of 2.43m BDP in idle capacity) to go through this pipeline.  Total potential alleviation of Hormuz crisis by Saudi Arabia:  6.2m BPD.

2) 1.5m BPD of Iraqi output can be diverted from Hormuz to the Turkish port of Ceyhan on the Mediterranean Sea.  This Kirkuk-Ceyhan pipeline was in disuse over contractual disputes for the past three years but has been recently re-started in response to the conflict in Hormuz.  Pause a moment to grasp the enormity of this development: The Kurds in the north of Iraq are cooperating with arch-enemy Turkey.

3) Since the onset of the Iran war, the UAE has diverted an additional 800,000 barrels per day of output from the Strait of Hormuz to the Gulf of Oman via the Habshan-Fujairah pipeline to reach full capacity of 1.8m BPD.

4) Iran continues to ship 1.8m BPD of oil to China through the Strait.

5) The International Energy Agency has committed to release 400 million barrels of oil over a 120 day period, or approximately 3.3 million barrels per day.  This commitment includes 172 million barrels from the US over that time period.  Although the average comes to 3.3m BPD, the IEA is capable of releasing up to 10 million barrels per day at any one time, putting them in a position to respond quickly to spot shortages. A reduction of 400m barrels represents about 40% of total IEA reserves.

The whole 20m barrels per day of oil shipped through the Strait of Hormuz has not vanished.  13.6 million barrels per day of oil potentially continue to enter the global oil market from this vital region compared with pre-war Hormuz.  The war has thus resulted in a net potential reduction of only 6.4 million barrels per day or about 6.4% of the global total of 100 million barrels per day consumed.

This is far less than the 11m BPD loss of oil reported by IEA Executive Director Fatih Birol. For him to contend that even the reduction of 11m BPD that he posits is worse than the 1973’s 5m BPD reduction overlooks the fact that 5m BPD of output then was 33% of the market then when oil demand then was only 16m BPD vs 100m BPD today.  Even an 11m BPD reduction in production today as he posits would be only 11% of total global demand, far less than impact of the 1973 oil shock.  While not pleasant, today’s reduction in oil availability because of the Strait of Hormuz is not nearly the Armageddon that the IEA and media make it out to be.

In the meantime, Brent crude prices have risen from $70/barrel to $115/barrel while WTI crude, representing some trapped crude production in the US, hovers at $100/barrel.  The question is whether these price increases have brought about a 6.4% reduction in global demand. That’s what simple supply and demand curves in the spot market are telling us.  Additionally, backwardation in futures pricing tells us that the market expects this conflict to endure less than 120 days.  Let’s hope so.

We are almost certain after this war to see more pipelines built to avert the perilous Strait of Hormuz.  The investment is small compared with the benefit.  Where markets are free, not even a spoiler like Iran can obstruct progress for long.

[Diamond Head @DiamondHeadFA]

Pulte said the administration is considering a public offering without actually exiting conservatorship” is false. Pulte never said this. @BillAckman

[Diamond Head @DiamondHeadFA]

Erroneous CPI and PCE readings that have led the Fed down a catastrophic path on interest rates are about to get much worse when accounting for tariffs unless something is done to fix them.

@realDonaldTrump @elonmusk @SecScottBessent

https://t.co/xuDqpu6RAW

[Diamond Head @DiamondHeadFA]

@realDonaldTrump @SecScottBessent

[Diamond Head @DiamondHeadFA]

Check out my latest article: Eight Reasons to Fire the Fed Chairman https://t.co/KSyva6Ng4V via @LinkedIn

[Diamond Head @DiamondHeadFA]

Check out my latest article: Eight Reasons to Fire the Fed Chairman https://t.co/KSyva6Ng4V via @LinkedIn

[Diamond Head @DiamondHeadFA]

@elonmusk

Goods represent 40% of CPI and PCE index weightings but only 15% of GDP.  This discrepancy could cause inflation readings to skyrocket from  tariffs, which affect goods not services.  Markets could crater.  BLS and BEA are the culprits.  Help!

[Diamond Head @DiamondHeadFA]

@federalreserve After two years of 40% expansion under Quantitative Easing, money supply started to decline in March after QE was halted. According to Milton Friedman, who said that “inflation is always and everywhere a monetary phenomenon,” arresting growth in the money supply alone is enough.

[Diamond Head @DiamondHeadFA]

@SullyCNBC Sinuses must be rinsed within hours of detecting a sore throat. Will this remedy work on coronavirus? Vanderbilt infectious disease authority Dr. Schaffner says coronavirus infection also begins in the throat.

[Diamond Head @DiamondHeadFA]

@SullyCNBC Rinsing the sinuses with saline nasal solution the moment a sore throat is detected kills a viral colony of flu that accumulates there before it invades the body. WHO has run flawed studies disclaiming this benefit: They test days after infection has spread.

[Diamond Head @DiamondHeadFA]

@realDonaldTrump
A virus must enter your body to hurt you. Your body temp wards off the invader everywhere except the sinuses where it is cool. Stop it there. Rinsing nasal passageways with saline solution when you feel a sore throat does the trick. No need for vaccine.

[Diamond Head @DiamondHeadFA]

@realDonaldTrump
China's ability to fund internal repression and militaristic expansion depends on the value of stocks like Alibaba on US exchanges. HK refused to list Alibaba because of fiduciary shortcomings. Why did NYSE allow? Go for the throat, de-list Alibaba from NYSE

[Diamond Head @DiamondHeadFA]

@realDonaldTrump It is unconstitutional for the Fed to spend taxpayer dollars propping up the overnight lending rate. No Fed has ever done this. 2.125% X $1.7 trillion at banks = $36 billion/yr. Only Congress has power of the purse. Fire Jay Powell. He is breaking the law.

[Diamond Head @DiamondHeadFA]

28% of the land mass in the US belongs to the Federal Government. That is 640 million acres, over $100 trillion in value, sitting idle. Do a $22 trillion sale-leaseback of BLM or Forestry lands to a REIT and pay off the national debt with the proceeds. @realDonaldTrump

[Diamond Head @DiamondHeadFA]

@realDonaldTrump It is time to convince Taiwan Semiconductor to move more production to its Camas, Washington facility. All logic chips except for Intel are now produced by TSMC in Taiwan. If China took over Taiwan, they could shut down the American electronics supply chain.

[Diamond Head @DiamondHeadFA]

The Federal Reserve's pending rate hike will invert the yield curve, causing recession. That's why markets are collapsing. Can someone please tell the Fed to cancel the December rate hike?

[Diamond Head @DiamondHeadFA]

@larry_kudlow The multiplier for cuts in corporate tax rate is 17x (ie the stock mkt PE multiplier), far more than 1.6x for govt spending!

[Diamond Head @DiamondHeadFA]

Addition of North Sea oil production brought oil to $15 1985. Addition of Permian and Eagleford shale production is of similar magnitude.

[Diamond Head @DiamondHeadFA]

Reversing QE by winding down the Fed’s $4.5tr balance sheet will have a far bigger impact on the economy than raising short-term rates 1/4%

[Diamond Head @DiamondHeadFA]

Oil vs. Energy. Check out CEO Steve Connell's opinion. You can also learn more at our investors meeting. #oilprices