Goldman Sachs traders warn: Trump's "bluster" can't replace crude oil. If the Strait of Hormuz disruption continues, a second wave of inflation may be on the way.

Why Has Verbal Pressure Lost Effectiveness in the Market?

The crisis in the Strait of Hormuz is pushing the market into a fundamental contradiction between rhetoric and reality. Senior traders at Goldman Sachs candidly state that words cannot replace physical molecules, and when verbal deterrence fails, the real stress test is just beginning.

Rich Privorotsky, head of Goldman Sachs’ One-Delta business, pointed out in a recent client memo that despite the U.S. once again postponing the deadline for strikes on Iranian energy infrastructure, the oil market’s reaction remains muted, with market focus highly narrowed to one question—when will the Strait of Hormuz reopen? He warned, “You cannot replace molecules with rhetoric.”

In terms of market impact, Privorotsky believes the inflation shock from the disruptions in the Strait of Hormuz extends far beyond crude oil itself, spreading into diesel, petrochemicals, plastics, and even helium. The related price pressures will gradually transmit to broader economic levels in the coming months, forming a potential second wave of inflation.

Meanwhile, he emphasized that interest rate trends remain the overriding core variable, and a breakthrough rise in real interest rates will put pressure on the stock market.

The “Molecule” Dilemma: Verbal Pressure is Losing Market Effectiveness

Privorotsky characterizes the current situation as a widening gap between fundamentals and narrative. He noted that the market’s reaction has weakened—the White House’s statements still exist, but their effectiveness is diminishing; once this tool completely fails, the market will face repricing.

In his view, the current fundamental scenario still points to further escalation, but he does not entirely rule out the possibility of a turning point, just that these turning points “are not obvious and will not be led by the U.S.”

The first round of negotiations seems to have failed even before officially starting, leading the market into a waiting mode, betting on whether some compromise can naturally emerge after the accumulation of pressure.

Second Wave of Inflation: The Shock is Spreading Downstream

Privorotsky holds a bullish long-term outlook on oil prices, reasoning that the option value of the Hormuz disruptions has become a real and repeatable risk premium.

The consumption of the Strategic Petroleum Reserve (SPR) means that some point in the future will require repurchasing, which further supports long-term crude prices; he believes it is reasonable to buy long-dated crude and leading energy stocks in any de-escalation scenario.

However, what is more concerning is the diffusion path of inflation shocks. He pointed out that if the disruptions continue, price pressures will no longer be limited to crude oil but will fully permeate into diesel, petrochemicals, plastics, and even helium, with second-order effects expanding and gradually reflecting in inflation data over the coming months.

Interest Rates are Key: Asset Logic in a Stagflation Scenario

Privorotsky clearly stated that the importance of interest rate trends surpasses everything else. He warned that tightening at the end of the cycle is the worst environment for equity assets, and the combination of aggressive bear flattening and a breakthrough in real interest rates will create continuous pressure on valuations—even if corporate profits barely hold up, PE ratio compression is hard to avoid.

In terms of asset allocation, he noted that under stagflation shock scenarios, governments may be forced to make trade-offs between defense spending and energy and food subsidies, and this fiscal constraint explains why the defense sector has underperformed expectations.

Regarding gold, he believes that the current situation resembles an opportunity rather than a warning. The tightening at the end of the cycle combined with fiscal overspending on the other side can support both a strong dollar and rising gold prices.

Risks and Turning Points: If the Strait Reopens

Privorotsky admitted that holding risk assets is unsettling at present. The 10-day pause in U.S. strikes on Iranian infrastructure has not eliminated the risk of renewed conflict over the weekend; while positioning and sentiment provide some support for the stock market, month-end funding demand exists, but interest rates remain the decisive variable.

He outlined a critical reversal scenario: if the Strait of Hormuz reopens, the bear flattening will be lifted, real interest rates will fall, and energy and financial conditions will loosen simultaneously, providing the market with a significant dual easing.

He concluded with this: after sufficient pressure accumulates, compromises usually follow, and from a longer-term perspective, maintaining a constructive stance in such environments has historically been the right choice.