Title: Make 1973 Great Again — Analogs, Second Order Effects, Bonds, and More Show: Paulo Macro (Substack) — paid Guest: Paulo Macro ("Cloudbear") Date: 2026-MAR-08 URL: https://paulomacro.substack.com/p/make-1973-great-again Length: written post (no timestamps) Note: Back-filled post (processed 2026-JUL-07). With a Mideast energy crisis underway (oil to $150/bbl scenario, Strait blockade risk), Paulo calls this the biggest macro opportunity set in decades. He dusts off the 1973 Yom Kippur War / Arab oil embargo analog and maps it across assets: crude quadrupled ~$3→$12 (mostly after the ceasefire), USD rallied as the D-Mark sold off, gold/silver dipped then doubled into 1Q74, equities peaked Oct 29 1973 then collapsed -17% into year-end, and rates rose (10yr ~6.7%→8%+, curve inverted). His bond call: in a jobs-recession + energy-crisis debt spiral, bonds are an accelerant not a stabilizer — long-end term-premia pain even under a "Warsh Fed." Second-order equity effects of $150 oil (energy-intensive COGS pass-through, levered PE roll-ups, thin-margin logistics retail — "Goodnight WMT 40x earnings?"). And a wheat/fertilizer trade: wheat as the "geopolitical VIX," food export bans (Kuwait), the 1973 wheat explosion ($2.60→$5.20 then +50% to $6.35). Body reproduced for personal study; Substack chrome removed, wording otherwise verbatim.
Putting aside all human elements of the ongoing tragedy in the Middle East, my recent realization amidst the insanity underway is we are staring at the biggest opportunity set for macro in decades, and that is quite a statement considering we have already had Covid and Russia/Ukraine. It's like sitting in cash watching a river of money flow by when all that is needed is to kneel down and put your hands in it. Like noodling for giant cashfish. All you need is your hands and pull. I'm not saying it's easy — far from it. But I'm saying the opportunity set is immense and almost nobody is around anymore who has any experience trading this. In its quest for high Sharpe/low vol with leverage, the entire asset management industry is set up entirely the wrong way for what is happening. The asset reallocation, capital flow, and outright wealth destruction ahead is of historic proportions. As I told my friend over a year ago, Trump's reelection meant Make Macro Great Again.
Today I am going to share some loose thoughts on second order effects of the ongoing energy crisis in terms of equities, and then revisit the 1970s. I will start with the latter first.
Make 1973 Great Again
Last July I wrote a note called A Fresh Look At Inflation where I discussed the possibility of multiple successive inflation waves touching off (this idea goes back to 2022). Specifically I wrote in the section "Will There Be Another Inflation Wave?" where I wrote "I remain concerned that we have sown the seeds for another significant inflation wave." It's worth skimming that section as I put together some charts of what the big early 70s second inflation wave looked like across assets.
By now everyone is aware of parallels to the Arab Oil Embargo of 1973. In most ways this one is far worse (% of global oil compromised even adjusting for much higher daily consumption, etc), so this is a good time to dust off some of those charts and bone up on some history for which nearly everyone in the market was not around.
Quick background: The event in question relates to the Yom Kippur War which started with a surprise attack by Egypt and Syria on Israel on Oct 6th, 1973. Fighting lasted only three weeks and stopped on October 26th with a UN-brokered ceasefire. In the middle of the fighting on October 17th, Arab OPEC members agreed to an embargo (and phased production cuts) against the US, Netherlands, and other perceived supporters of Israel. By November 1973, Arab producers had reduced exports to the West by roughly 60–70%. Here is the Arabian Gulf Arab Light Crude Spot price from back then (all Bloomberg charts below have my notations):
You can see that the nominal price of crude roughly quadrupled from ~$3/bbl on the eve of the war to nearly $12 by January, and most of the rally actually happened after the ceasefire.
What of other major asset classes? Here's the USD and Deutsche Mark (inverted) vs CPI YoY. The yellow vertical line denotes one week after the Yom Kippur War began (consistent with where we stand today, one week in). You can see the USD rallied significantly as the D-Mark sold off (inflation had already started rising earlier that year and took off):
Here is gold and silver… you can see the precious metals initially sold off, but by December they were ripping higher and doubled into mid-Q1 1974:
For equities, after peaking in January 1973 (the height of Nifty Fifty) and leaking/meandering around as inflation picked up, the market tried to cling to highs for a few weeks (peaked Oct 29th), and then collapsed in November to end the year -17% lower:
As we think about convexity and asymmetry, rates were pretty interesting too:
Note that the 10yr yield hung around for a few months but eventually rose from ~6.7% to over 8% in 1974. The 3mth and 12mth Tbill yields meanwhile popped from ~7% to 8% almost immediately before the curve heavily inverted (short-term yields had their final peak at over 9% in 3Q74).
I know nobody believes rates could possibly go up under a Warsh Fed, particularly since the Fed is totally lost on what to do about AI and oil, but if the Fed decides to keep rates flat or even cut, I think the table is set for the long bond to take enormous pain. I suppose you can say "they will panic and cut rates anyway" but that's not consistent with what FOMC members have been saying recently. You can also say they will do yield curve control and go full BoJ…but in the thick of an obscenely inflationary maelstrom for which Trump no doubt will blame them later as the politics around inflation explodes? We talked here a few days ago about the consensus in rates (see final charts). If the Fed is frozen, this 1973 analog may prove useful, but with the real damage coming from term premia in the long end. Bets on a rate hike are pretty cheap though too…
Digging into the Bonds
Let's set aside oil, energy, fertilizers/ags, product cracks, and other opportunities I have already discussed at length in the notes and on chat, and focus on the bonds. There is clearly a fear that duration will rally hard because of recession/Risk Off/Flight to Safety. To be clear, I think a severe global recession is nearly inevitable at this point. This crisis will not end in a few weeks, and talk of off-ramps is misplaced (and consensus!) when you look at the current conflict through the lens of game theory. There is no Nash Equilibrium where Iran does a deal for the next few months. The US killed their pope, along with a parade of other followers who might take the role. They killed schoolchildren. Regime survival is existential, and their optimal strategy is to go full Houthi, harass and blockade the Straits as best they can, send US gas prices to $8+ a gallon, throw the world into global recession where allies in Japan, Korea, Taiwan, and Europe all blame Trump, and ensure he gets destroyed in the midterms as American consumer confidence and the economy tanks. There is no deal here. This all becomes a question of US capability to keep the oil, gas, and chemicals moving. Pretty sure I have addressed why this is problematic, but if you take a simple look at Iran's topography, you understand why attempting to escort vessels and defend against mass drone and missile attacks from hidden weapons systems in mountainous terrain becomes a recipe for failure.
So the bonds…remember this chart from February's BofA Fund Manager Survey? Look at the Hard Landing vs No Landing — this is how people were thinking a few weeks ago, and big money has barely begun to move and price a completely upended reality:
Perhaps being short bonds should be in the "too hard pile" because the Hard Landing has to be priced in first. That's a reasonable view. However the reality is that the longer this drags on:
The US deficit to GDP blows out which that makes Iraq/Afghanistan look like a picnic;
We still have no color on tariff refunds (that money is tied up in court but some part of it is going back);
If AI economy bears are even halfway right, we have white collar job losses ahead;
An energy shock hitting the consumer wallet and grinding the economy down;
We are headed for a massive recession.
Recession of any kind — especially a jobs recession + energy crisis — means a collapse in tax receipts while spending skyrockets due to war spending. In this kind of recession, bonds are not a portfolio stabilizer, but rather an accelerant. Some call it a debt spiral. We talked a lot about this a year ago when we discussed The No Fly Zone here and here. I think we are closer to this than people appreciate, particularly given the prospect of Middle East sovereign wealth turning sellers of foreign assets. And even more problematically, it leaves traditional portfolio managers few places to hide and scatters investor confidence further.
During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold and short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era.
— The Memoirs of Herbert Hoover, The Great Depression 1929-1941, pg 67
Second Order Effects In Equities
Subscribers in the chat will have already seen these thoughts from me on Saturday night, but here goes a review of some second order effects (my thanks to reader Ian Chew for compiling these in one place for those curious) … lightly edited for typos and clarity.
What $150/bbl means for various sectors as we head into a credit downcycle.
It's stating the obvious but energy touches everything. $150/bbl is going to blow up a lot. First, let's think where energy (fuel, power, feedstock) is structurally a very high share of COGS, and product is relatively commoditized:
Petrochems/plastics/steel/aluminum need immediate pass through or they are screwed.
Cement/glass/building mats
Pulp/paper/packaging
Anything smelter related
Miners
Now, think about manufacturing and industrials with high energy intensity (beyond the obvious heavy industries mentioned above)...
Automotive and components (confirmed by a reader in auto components — this is armaggedon).
Food processing: Food industry is energy‑intensive (processing, refrigeration, transport)
Textiles/consumer goods manufacturing: Energy and petrochemical inputs (fibers, dyes, plastics); global competition limits pricing power, so higher input costs plus weak demand = disaster. Bangladesh and other textile EMs are dead.
Now, let's think of second‑order effects in a high‑oil and credit‑tightening environment…
Construction and real estate development: Material costs up (steel, cement, glass) + transport costs raise project budgets; in a rates‑up / credit‑tight context, projects get cancelled or delayed. This stresses levered contractors and small developers.
Retailers with thin margins and high logistics content: Big‑box, discount, grocery formats with large logistics footprints and refrigerated supply chains see transport and utilities costs skyrocket; price competition makes full pass‑through difficult in a demand shock. Goodnight WMT 40x earnings?
Highly levered industrials and PE‑owned roll‑ups: Any roll‑up in an energy‑exposed vertical (specialty chemicals, components, transport services) with high leverage is fragile when both margins and volumes compress and refinancing windows close.
Of course, there are the discretionary consumer/tourism verticals with high fixed costs and elevated fuel exposure (airlines, cruises, hotels). The airlines will pass through despite near-total lack of hedging programs, but the hotels and cruises should suffer significantly.
Wheat
I spoke about this quite a bit with my buddy Le Shrub on Friday and he agrees — there is a wheat trade in here as well (see his note from today for some thoughts in there).
Look back at every major global conflict, and you will find that the price of wheat soars. In this case, the exposure to fertilizer and its precursors is extraordinary. Many missed this with the focus on China's gasoline/diesel export ban, but Kuwait declared a food export ban on Wednesday and I fully expect other nations to follow suit. The highest impact, highest probability cause of social unrest in human history is rising food and hunger (remember Arab Spring?). In this regard, the move in wheat following the Russian invasion of Ukraine could be an appetizer, as Russian and Ukraine production and exports were largely unaffected.
Look at the wheat price — it looks like the VIX for a reason (a geopolitical VIX sometimes?):
We looked at charts above for 1973 — how did wheat do back then? Wheat charts didn't used to go back that far, but Bloomberg recently updated them — have a look:
Interestingly, between the two charts you can see wheat spent many years trading between $1-2/bushel. In 1972 as inflation began to rise in the second wave, so did wheat. In the summer of 1973 wheat simply exploded in a move from from $2.60 to $5.20 in the July-August time frame. It corrected back to ~$4.20 by the eve of the Yom Kippur war… and then ripped another 50% to $6.35 by February.
For confirmation, I have my trusty Professional Commodity Trader by Stanley Kroll from 1974 with his diary of charts. His trading in the wheat May74 contract confirms the two big moves, and interestingly also suggests that the wheat curve was steeply backwardated (this is highly unusual given the short-cycle storage nature of ags). Bloomberg's front month price on the eve of the war shows $4.25, but Kroll's May74 contract showed a bottom around $3.80:
I am strapped in for wheat upside along with positions in a few fertilizer plays. TL/DR:
Traders have been overly focused on the supply/demand/stocks balance which for now is fine (they are too close to this market);
There is a chance for spring wheat quality issues in the US stemming from the severe January cold which hit with insulative snow cover in the upper midwest states;
Russia/Ukraine was not even particularly disruptive to wheat but enough to send it to the teens;
Food export bans are likely;
Wheat is the ultimate geopolitical VIX;
It is barely off the mat…
…this has the hallmarks of significant asymmetry and convexity for me.
Stay safe and stay frosty…
As always, kindly yours,
paulo aka Cloudbear