Global equity markets have defied gravity since the Iran conflict erupted in late February. Despite closed shipping lanes, surging energy costs, and mounting evidence of a global slowdown, risk assets have barely flinched. According to Andrew Hunt of Andrew Hunt Economics, the explanation is straightforward: we are living through a stealth quantitative easing programme of historic proportions, and markets are riding the wave on what he bluntly calls "faith."

Hunt estimates that between $300 billion and $400 billion per month is being injected into the global financial system through a combination of channels. The Federal Reserve is purchasing securities at both ends of the yield curve. The US Treasury has been running down its cash balances, flooding the banking system with deposits. And the People's Bank of China, intervening aggressively to prevent the renminbi from rising, is routing an estimated $150 billion per month through state-owned banks and offshore financial centres. The result is that US money-centre banks are awash with cash, deploying it into prime brokerage facilities and fuelling hedge fund leverage. The parallel Hunt draws is not subtle: this is mid-2020 all over again, or, more ominously, December 1973.

The comparison to the first oil shock is deliberate. If the Strait of Hormuz remains closed for another fortnight, this disruption will have exceeded the duration of the 1973 embargo. Hunt argues that the seasonal calendar makes the timing particularly dangerous. Northern hemisphere industrial production begins ramping from June; tankers take four to five weeks to reach Asian refineries. In practical terms, the strait needs to reopen this week to avoid energy shortages when the world starts travelling and manufacturing again.

On geopolitics, Hunt has hardened his stance. He now views a rapid resolution as unlikely. With Iran's leadership largely eliminated, there is no coherent counterparty with which to negotiate, a lesson, he notes, that the architects of post-war Japan understood when they deliberately spared the Imperial Palace from bombing. Iran's remaining regime, meanwhile, faces an existential domestic crisis: hyperinflation, infrastructure damage, and an opioid epidemic affecting at least three per cent of the population. Reopening the strait and charging premium transit fees is worth eight to nine per cent of GDP, the regime's most viable path to reconstruction and survival. They have every incentive to hold out.

The inflation picture is becoming entrenched. Asian export price inflation has surged from zero to ten per cent in weeks. US household inflation expectations are pushing five per cent. Pre-emptive price rises are appearing in economies as diverse as New Zealand and the Channel Islands. If this persists, Hunt believes the Fed will eventually be forced to pivot from supporting financial markets to fighting inflation, the moment, he argues, that bursts the bubble.

For asset allocation, the implications are significant. In the near term — the next two to three weeks — Hunt advises riding the liquidity trade but not becoming wedded to it. As prices reach attractive levels, top-slicing makes sense. Beyond that, the playbook shifts materially. The environment favours traded goods producers with pricing power and cost control over financialised, asset-heavy, or long-duration names. This is, in essence, an anti-globalisation trade, the reversal of thirty years of falling traded goods prices.

Cash has a role, particularly if a risk-off moment materialises around mid-year as inflation data deteriorates. Gold, currently distorted by central bank activity, should eventually reassert itself as an inflation hedge. And the currency question looms large: which economies possess the productivity growth, credible policy settings, and external balances to weather sustained commodity price inflation? The Australian dollar and several South American currencies are early beneficiaries of precisely this dynamic.

Markets may continue to levitate on liquidity and confidence for a little longer. But the real economy is sending increasingly urgent signals, and at some point the central banks will have to choose between supporting asset prices and fighting inflation. History suggests the transition, when it comes, will be abrupt. That said, this should not be construed as financial advice or an invitation to trade as the inherent uncertainty implicit in all of this is clear and individual’s attitudes to uncertainty and their circumstances will differ widely. However, this does offer a framework through which to understand why markets continue to rise despite the odds and may continue to do so.