Allocation targets under worst case. 50% in capital preservation (treasuries + cash), 50% in crisis beneficiaries.
Capital preservation. Yield 4-5% while waiting for opportunities. Zero duration risk. Liquid.
Dry powder for distressed buying when blood is in the streets. USD appreciates in crisis (DXY +8%).
Crisis hedge. Target $3,200. Central bank buying accelerates. No counterparty risk.
Direct Hormuz closure beneficiary. Rates $30K to $200K+/day. Massive free cash flow generation.
Global defense spending surge. Multi-year order backlog growth. Missile defense systems in extreme demand.
Benefit from $150+ oil without Gulf disruption risk. US shale and Norwegian offshore production secure.
Iranian cyber retaliation creates urgent spending. Government + enterprise budgets surge 3-5x.
Food price inflation hedge. Fertilizer cost pass-through to grain prices. Small allocation, high convexity.
Sectors and asset classes with maximum downside under worst case. Reduce or eliminate exposure before escalation triggers hit.
Jet fuel cost spike, Middle East airspace closure, demand collapse. Bankruptcy risk for weaker carriers.
Energy crisis redux. Manufacturing recession. Euro weakens. Growth and value both hit.
Hormuz oil dependency. US-China tensions spike. Taiwan risk premium rises. Supply chain disruption.
Consumer spending collapses as energy costs absorb disposable income. Auto sales, luxury goods, travel all devastated.
Dollar-denominated debt unserviceable. Capital flight. Multiple sovereign restructurings likely.
Rising rates crush valuations. Gulf RE collapses. Vacancy spikes as companies retrench. Recovery 18+ months.
Asymmetric payoff structures for tail-risk protection.
VIX to 50-55 in worst case. Calls at $25-30 strike offer 5-10x payoff. Portfolio insurance.
S&P 500 -20 to -25% downside. Put spreads (5100-4800) provide defined-risk protection.
Oil to $150-200. Call spreads capture upside with limited premium outlay.
Euro weakens 8% on energy crisis. Carry positive (rate differential). Structural short via futures or options.
EM currencies collapse. TRY -30%, PKR -25%. Asymmetric payoff profile.
| Event | S&P Drawdown | Market Bottom (mo) | GDP Recovery (mo) | Oil Normal (mo) |
|---|---|---|---|---|
| 1973 Oil Embargo | -48% | 22 | 36 | 48 |
| 1979 Iran Revolution | -27% | 18 | 30 | 60 |
| 1990 Gulf War | -20% | 3 | 12 | 9 |
| 2001 9/11 + Afghan War | -32% | 12 | 6 | 18 |
| 2022 Russia-Ukraine | -25% | 9 | 12 | 12 |
| 2026 Iran (worst case) | -25% | 18 | 24 | 36 |
Historical pattern: the optimal buying window opens 60-80% into the drawdown, typically when VIX peaks and credit spreads are widest. In 1973, that was month 15-18. In 1990, month 2-3. In 2022, month 7-9. Under worst case (18-month bottom), the buying window opens around month 12-14.
Key signals to watch: VIX sustained above 40 (panic), HY spreads above 600bp (credit stress), oil futures curve in extreme backwardation (peak supply fear), and initial diplomatic contact (political signal).
| Trigger | Signal | Action |
|---|---|---|
| Gulf infrastructure struck | Aramco/UAE port damage confirmed | Full worst-case allocation: rotate into playbook above |
| Hormuz closure confirmed >2 weeks | Insurance withdrawn, tanker rates 5x+ | Add tanker/energy exposure, buy VIX calls |
| Proxy war goes multi-front | Hezbollah + PMF + Houthi simultaneous escalation | Maximum defense allocation, exit European equities |
| EM sovereign downgrade | Turkey/Pakistan/Egypt downgraded to junk | Exit all EM exposure, short EM FX |
| VIX >45 sustained | 3+ consecutive days above 45 | Begin bottom-fishing: add quality names at 3-year lows |
| Diplomatic contact resumes | Any credible ceasefire negotiation | Begin unwinding crisis positions over 4-8 weeks |