If War is Terrible. Why is the Stock Market All Time HIGH?

Kind: captions Language: en Russia invades Ukraine. That headline alone should have crashed the stock market. Instead, something unexpected happened. As missiles rained down on Keefe, the S&P 500 opened deep in the red and then erased [music] the entire drop and closed higher by the end of the day. In the middle of a war, investors started buying. It profited [music] from conflict. And it wasn't an accident. You probably remember where you were when you heard. The images were hard to look away from. Columns of armor rolling across flat Ukrainian fields. Pelletorn troops assaulting Hostamel airport. Civilians huddling in subway tunnels. Explosions booming over Keefe. Every network had cut to live coverage and every analyst had an opinion. The consensus delivered with unusual unonyimity across every trading desk and television screen was some version of the same thing. Europe and the world needed to brace for something seismic. And for the first few hours, the market agreed. The S&P opened down 2.6% which made sense. It was the only rational response to the chaos the world was watching unfold. And then something less predictable happened over the next 6 hours. As the invasion continued and the death toll mounted, the index crept upward and it kept going mechanically without pause or regard for everything happening on the other side of the world. By 400 p.m. it closed up 1 1.5% a 4.1% intraday reversal. In simpler terms, the S&P 500's total market cap at the time was roughly $ 38 trillion. That 4.1% swing represents approximately $1.5 trillion in value. It's like the entire market capitalization of a Samsung, Tesla, or Walmart being wiped out and then fully restored in 6 hours. People think the [music] stock market is a barometer, a gauge tethered to reality. When things deteriorate, the gauge goes down. When things improve, it goes up. That's pretty intuitive. and simple enough for anyone to grasp, except on the day that Europe slid into the largest conventional war in generations. The gauge effectively screamed bullish. And it wasn't alone. In April 2026, after weeks of missile strikes involving Iran, Israel, and direct American military action, markets again behaved as though somebody had inverted the wiring. When Washington announced a two-e ceasefire with Iran, headlines exploded. CNBC anchors called it a global relief rally, lifting global assets as oil prices [music] plunged and markets instantly ripped upward. The Dow surged, the S&P climbed 2.1%. Bitcoin soared to over 71,000. Global markets from Frankfurt to Tokyo were pricing in peace. Except the ships in the straight never moved. Maritime traffic data showed the 24 mile straight of Hormuz, the single most important oil choke point on the Earth, was still practically frozen. Before the war, around 3,000 vessels transited the strait every month with 17 to 21 million barrels of oil per day. In the immediate aftermath of the April 8th ceasefire, only 45 ships entered or exited the straight. Traffic collapsed to 5% of the pre-war average. Most of the world's largest shipping companies kept their vessels trapped in regional ports and declined to move them. By the end of April 2026, a mere 191 ships transited the strait the entire month, a far cry from the pre-war average of 138 ships a day. The Iran war in early 2026 looked ugly enough to make even seasoned traders nervous. There were missile exchanges between extremely volatile countries, which led to oil disruptions and escalation risks involving American military assets in the region. Human traders responded to the expected economic wobble the way they always do when the sky darkens. They shorted everything they could find. Goldman Sachs prime brokerage data, which tracks the actual positioning of the largest hedge funds in the world, showed institutional investors dumping global equities in March 2026. It was at the fastest [music] pace in 13 years. That was the second largest selling episode Goldman Sachs ever recorded. Short sales were outpacing long purchases by a ratio of 7.6 [music] 6:1 and gross leverage stood at 312%. That basically means that institutional positioning had become violently bearish. In plain English, the most expensive minds on Wall Street had collectively walked into a theater, detected smoke, and then sprinted toward the exit at full speed, [music] but not before they stopped at the door on the way out to borrow additional gasoline on margin. And in doing so, they accidentally built an economic bomb. Since every short position contains a future buyer trapped inside, when you short a stock, you borrow shares from someone else and immediately sell them. The hope is that the price falls so you can buy them back cheaper later and then pocket the difference. Remember the GameStop to the moon phenomenon during the COVID pandemic? Like that. But if stocks rise instead, your losses are theoretically unlimited. You still owe those borrowed shares back and every tick upward tightens the vice. Eventually, your broker stops asking politely and forces you to close the position before the losses become catastrophic, meaning that you're now forced to buy because a man in risk management says so. And he is not joking around. Now, scale that up across hundreds of billions of dollars in leveraged bearish bets sitting inside an already hyperlastic market. The kind of marker where every dollar of buying moves prices $5 in aggregate. What it stops resembling is sane investing. What it starts resembling is someone compressing an industrial spring beneath a hydraulic press, hoping nobody is dumb enough to even breathe near the release lever. By April 2026, that spring was fully compressed. Then on April 8th, the ceasefire announcement hit. The prices ticked upward ever so slightly, far from enough to move tankers back into the straight of Hormuz, but just enough to move the number on screen fractionally higher. And that was when the trap snapped shut. Short squeezes are one of the few financial phenomena that still retains traces of primal human panic. Most modern markets feel sterile and algorithmic, but a real squeeze still has an ancient, timeless quality about it. It feels predatory, like watching a herd realize too late that [music] the valley floor is moving underneath them. The first bears caught in April 2026 probably thought that a ceasefire rally would fade within hours. The shipping data was catastrophic. For all intents and purposes, the Straight of Hormuse was functionally closed. Iran and the IRGC were still at the time disputing the terms of the ceasefire the morning after it was announced, [music] and nothing fundamentally improved. You couldn't blame anyone for reading this evidence and assuming the market would continue to fall. Just don't tell the market that. Once the market started climbing, the margin calls began arriving and funds that had borrowed aggressively to build short positions suddenly needed additional collateral. The losses were widening faster than the models predicted. [music] Brokers started to demand that positions be closed immediately, which meant buying back the stock they borrowed, which forced more buying, which pushed prices higher. That triggered margin calls at other funds which created more forced buying which pushed prices higher still which finally created a self-reinforcing loop. The bears were not exiting carefully. They were being liquidated in each of the largest positions in 13 years unwound simultaneously. Since so much of that positioning sat inside broad index products and exchange traded funds or ETFs rather than individual stocks, the squeeze hit the entire market at once. The terrifyingly elegant part of a squeeze is that nobody involved needs to become optimistic. The buying happens anyway. Nobody woke up on April 9th thinking the Persian Gulf had suddenly become a paradigm of geopolitical stability. They bought because their broker gave them no other option and they were not in a negotiating mood. For a moment, this looked like a complete explanation. War creates fear. Fear creates excessive bearish positioning. Any upward tick triggers forced buying. Except that's not the whole story. Short squeezes burn hot and fast. They explain violent intraday reversals, the kind of 4% whipsaw that the S&P executed while tanks crossed into Ukraine. But they do not on their own explain sustained rallies worth trillions of dollars running across multiple volatile weeks. Commodity trading advisers or CTAs are vast systematic trading operations run almost entirely by algorithms. These enormous pools of capital collectively managing hundreds of billions of dollars are all programmed around one thing, trend following models. They scan price action continuously and respond according to predefined rules in the system. Basically, if price crosses X threshold, buy. If price drops below Y threshold, sell. That's the entire decision-making process in a nutshell. It's datadriven and sterile. The model checks the number, the number crosses the line, the model buys. It all happens in milliseconds on an institutional scale. When the post ceasefire short squeeze pushed the S&P above several key trend thresholds, the specific geopolitical reality became completely irrelevant. The code detected upward momentum, so the code bought in. Goldman Sachs prime brokerage data confirmed approximately $86 billion in global equity buying from CTAs in the single week following the ceasefire announcement. It ranked among the top five strongest buying episodes ever recorded by the firm. $86 billion poured into the market. While analysts were still debating Iran's naval strength, whether the ceasefire would hold, and what global shipping data was actually signaling, none of it changed the outcome, the money still flowed. Again, the system saw numbers cross some lines, and that was sufficient. The psychological ramifications of this are difficult to overstate. For generations, people imagined Wall Street as a competitive ecosystem of brilliant analysts all racing to interpret reality faster than anyone else. The guy who did the most homework usually won. What April 2026 actually looked like was a gigantic automatic transmission receiving a momentum input and responding with force amplification. A force completely indifferent to the quality or the accuracy of the signal triggering it. This gets even more uncomfortable when you contemplate the ethical implications. Algorithmic trading systems are not available to everyone equally. The infrastructure required to run them is accessible only to the largest institutional players, hedge funds, investment banks. Nobody designed the system to be predatory. It simply evolved that way, which is the major problem here. And the consequences are measurable. In May 2010, algorithmic activity contributed to what's become known as the flash crash. The Dow Jones plunged nearly a thousand points in minutes before mostly recovering. The event was so fast it basically ended before humans could react. When it got investigated after, the question of who was responsible begged for an answer. Was it the developers who wrote the code, the institutions who deployed it, or the regulators who permitted it? While investigators eventually pinpointed a mix of automated spoofing and massive institutional algorithms, the broader question of ultimate accountability remains a massive gray area. The European Union has since mandated rigorous testing requirements for algorithmic trading systems [music] and required firms to report significant disruptions. Does enforcement actually keep pace with the speed of technology itself? Regulators are still working that one out. Defenders of algorithmic trading, and there are many, argue that they provide genuine benefits. Ask them and they might regail you with tales of deeper liquidity, tighter bid ask spreads, and lower transaction costs for ordinary people. All of which is true, even if you still don't understand what they were talking about. What is also true is that the profits from these systems flow overwhelmingly to a small number of firms that have the infrastructure in place to run them. And the deepest layer of this entire system still hasn't activated yet. Ever heard of the options market? Well, that's the place where volatility itself becomes [music] food for growth. Most ordinary investors think options are niche instruments used by aggressive traders with too many monitors and lamentable sleep schedules. Well, not anymore. By late 2024, 0 days to expiration options known as zero DTE accounted [music] for 51% of all S&P 500 options volume. They surpassed every other expiration category combined for the first time in history. In later months, the figure climbed above 60%. Millions of contracts were changing hands daily, enough volume to fill approximately 1 and a half million individual trade tickets on an average Tuesday. These are bets that expired the same day they're placed. Wall Street basically reinvented horse racing for institutional finance and then soldered it directly into the plumbing of the global economy. Once enough money concentrates into these products, the firms facilitating the trades are forced [music] into continuous hedging operations that never stop. Think of a sports bookie taking bets before a championship game. If too many gamblers pile onto the outcome, the bookie faces catastrophic losses. So, the bookie adjusts exposure constantly, trying to remain neutral regardless of what actually happens. Options dealers do the same thing. When traders become terrified during a war, they flood into put options. Basically, the same as disaster insurance that pays off if the [music] markets crash. Dealers selling those put options hedge their exposure by shorting stocks or futures. They have no choice. The math demands it. Fear forces the dealers to lean bearish. But when [music] the apocalypse declines to arrive on schedule and the ceasefire lands or the short squeeze fires and prices tick upwards, those hedges reverse violently. The put options suddenly decay towards zero and volatility collapses. Those same dealers who were short to hedge suddenly needed to buy back everything that they'd previously sold. This is known as the gamma trap where fear itself creates the conditions for mandatory future buying. And because zero DTE contracts expire so quickly, these feedback loops now operate in near real time. And that is how war scares can create volatility which drives put buying [music] which forces dealer hedging which leads to the stabilization of the panic which leads to the market rallying. The market fed on the fear generated by the event itself. [music] War or peace, panic or relief. The machine does not need to know which side wins. It needs the fear to exist long enough for the hedging flows to activate. We would call this the loop. The stock market most people grew up with is today little more than nostalgic branding. It is a useful fiction maintained mostly by financial television and quarterly statements landing in retirement accounts that nobody reads. What has replaced it looks a lot more like a volatility conversion engine than a stock market. Fear goes in, liquidity comes out. War in this framework becomes strangely useful. Destruction isn't economically good for business. Everyone knows that real people still die and shipping lanes close. But the volatility generated by geopolitical fear creates the precise conditions modern market structure requires. The market doesn't need to collapse. It just needs enough fear to trigger defensive [music] positioning, rapid hedging, and automated selling, only for all of it to reverse when the worst case scenario [music] fails to materialize by the afternoon. The market rises, not despite the fear, but because of it. Today, the old metaphor is simply broken. A barometer can reflect atmospheric conditions, but it can't manufacture hurricanes. The stock market in its current form no longer reliably does the former, and it occasionally profits from the latter. Once you see that clearly, the bizarre war rallies stop looking irrational. None of it is. The system works as the structure compels it to work. The loop no longer requires any optimism, [music] only motion. What's most eye opening is how quietly this transformation happened. We never got a dramatic announcement from Wall Street or a rousing speech from the podium of the New York Stock Exchange. The system just evolved one ETF inflow at a time, behaving like something built to metabolize fear itself until eventually bad news stopped breaking the market. It started feeding it. But there is an obvious question hiding underneath all of this. What happens if the fear actually does become too big to absorb? If this system has trained itself to recover from every shock, what happens the day it finally can't? Find out in What if the US economy crashes? Or watch this instead.