🔮 GEOPOLITICAL CONVEXITY
Jon Turek on frontrunning the ECB, the intersection of prediction markets and macro, and how the Iran war is already reshaping the Middle East
Jon Turek is a macro strategist who spent the last several years running a private advisory practice. His Substack Cheap Convexity relaunches today.
The Oracle caught up with him four days into the Iran-Israel war to discuss the implications of the conflict for macro markets and why prediction markets are becoming an essential tool for macro traders.
This interview has been edited for length. All answers are his own.
Your Substack is called Cheap Convexity. What does that mean?
The way I think about cheap convexity is looking for things where you’re not risking a lot but could potentially make a lot. Sometimes those manifest as lottery tickets. But more precisely, it’s about finding situations where the market is priced for one very certain world-state, while a new part of the distribution is becoming highly relevant and the market hasn’t fully respected it yet.
If you’re wrong, the market just trades its base case, which is where it already is. But if you’re right, you get a nonlinear move because the whole distribution has to re-price.
Prediction markets are a perfect vehicle for this framework because the distribution is explicit rather than implicit. You’re already trading a percentage probability, so the asymmetry is right there in front of you.
Can you give a concrete example of this?
Last year, in February or March, I was writing to my institutional clients about a yield curve steepener in Europe. Germany was on the precipice of major fiscal stimulus, driven by the new political climate and the pressure for defense spending. At the time, the German 2-10 spread was sitting at zero basis points.
In a world where nothing happened, that curve would still likely steepen a little, because curves normally steepen during cutting cycles and the ECB was still cutting. But in the world where German fiscal spending materialized, you could combine further ECB cuts with a massive amount of fiscal stimulus and the curve could go much, much steeper. If I was wrong, maybe I lose 5-10 basis points on a slower-than-expected cutting cycle. But the curve was never going to trade negative 25 or negative 50 basis points, because that only happens in aggressive hiking cycles, and the ECB was cutting.
The curve ended up steepening from zero to 75 basis points. That’s the kind of trade I look for: high floor, new part of the distribution becoming live, market not yet appreciating it.
The alpha there wasn’t necessarily predicting the German fiscal package would happen. It was understanding what the market was pricing and where distributionally it could be surprised.
How does that framework translate to prediction markets? What would you have been watching on Polymarket around that trade?
There are two sides to this. On the input side, it’s becoming well documented that prediction markets influence traditional markets directly. Two years ago, during the first Israel-Iran flareup, energy traders were not really watching Polymarket. This time around, every energy trader had it up on their screen. That is now entrenched and will only grow as these markets get deeper.
On the output side, I think there’s a real opportunity to use prediction markets to speculate on macro variables directly. The Fed funds markets on Polymarket are already deep enough that a smaller institutional player could put real size in.
But beyond that, you can pick and choose the exact part of the distribution you want to express. Two years ago if I wanted to bet on where US 10-year rates would be, I’d have to back into it through options pricing on futures. Now I can just look at Polymarket and see: what’s the probability the Fed is at 2.75% next year? I don’t need to reverse-engineer it from a call spread.
You’re in Israel and living through this conflict in real time. What are the most relevant Polymarket contracts for macro traders right now?
The obvious ones are ceasefire timing and Hormuz closure. Every energy trader has those up on their screen. But the more interesting trades to me are the second-order effects.
The one I’ve been playing with is Israel-Saudi normalization by end of year. That market has moved from 10% to 25% over just the last couple of days, as the market starts to appreciate that if Israel emerges as the regional security guarantor, normalization stops being a choice and starts being a matter of necessity.
Muslim countries have actually received more Iranian missiles in this conflict than Israel has. That’s a fact that permanently changes regional calculations. I think normalization is basically a matter of when, not if, at this point. The shekel would rally hard on that news, and I don’t think shekel traders are fully pricing a 25-30% probability of that outcome.
The other second-order I’ve been thinking about is whether this conflict mechanically increases the probability of a Russia-Ukraine ceasefire. The munitions constraint becomes more binding when you have multiple fronts open simultaneously. The US is acutely aware that you don’t want too many active conflicts while the Asia risk around China-Taiwan is always in the background. Ceasefire odds for Ukraine have come way off this year, but I think a prolonged conflict here actually makes a deal more likely, not less.
Why hasn’t China-Taiwan risk gone up? My instinct was that a distracted US would be an invitation.
The problem for China is that they’re the world’s biggest energy importer, and 20% of their LNG comes from Qatar, which is right in the middle of this. Aggressively moving on Taiwan in the middle of an energy shock is not the backdrop you’d want. They have reserves, they’re well managed, it’s not that they’ll run out. But energy is their structural weakness.
It’s not a simple time for China right now. That’s probably why you haven’t seen the geopolitical risk premium spill over into Taiwan contracts the way an armchair strategist might have expected.
On Hormuz closure. Our recent interview with Doomberg made the point that the real question isn’t whether it closes, but how long it stays closed. Duration is what matters.
That’s exactly right, and I’d go one step further. Right now the Hormuz contract is effectively a ceasefire question. The strait is technically open, it’s just that nobody rational wants to sail through it.
The more pressing issue for financial markets is impairment. If there’s a ceasefire tomorrow but a Qatari LNG facility has been damaged, the strait can be open and you still have a massive energy shock. I saw an engine facility in Bahrain get hit. Any physical impairment of infrastructure makes this a much more lasting event even if the shooting stops.
I think there should be better Polymarket contracts around this. Qatar Energy has a contract starting to get some volume, and that’s exactly the right direction. The area under the curve, what’s the cumulative supply disruption, matters more than the point-in-time closure question.
What feels most mispriced to you right now, on Polymarket or in traditional markets?
A few things stand out. First, the European Central Bank hiking rates this year. A week or two ago, the probability of an ECB hike was essentially zero. I think it’s now becoming possible we see more than one hike. Europe is extremely dependent on Qatar LNG. They’ve been weaned off Russian energy. They’re coming out of winter with dangerously low gas inventories. Their tolerance for even short-lived inflationary episodes is very different from other central banks, and their mandate is their mandate. The market has not fully digested this.
I’ve also been working up a piece on Christine Lagarde leaving the ECB chair by end of 2026 . I think that’s materially underpriced. The French presidential election next April has real potential to go right-wing, and Lagarde would not want a new right-wing French president to have influence over who her successor is. She has strong incentive to exit on her own terms before that happens.
On Europe, do you see political ramifications beyond the ECB? Starmer, other European leaders at risk?
The UK seems to be coming out of this the weakest politically. Starmer came into this episode already pretty weak, and I think the political ramifications will be relevant there. The more interesting one to watch going into next year is the French presidential election in April 2027. That’s going to be a massive event for both traditional financial markets and for Polymarket. It’s the kind of thing that should be on every macro trader’s radar right now.
What’s your broader view on how this conflict ends, and what Iran looks like on the other side?
The constraint on this war, as Blinken once put it, is markets and munitions. Trump is not going to be running this campaign with oil at $120 going into midterms. The hawks in the administration might say: we can wrap this up in six weeks and have oil back at $55-60 by then, and everything is fine. That’s the scenario they’re gaming. What they’re calling the “Donroe Doctrine” is that the administration moves swiftly in military episodes and gets out.
On what Iran looks like after: I’m actually a bit more optimistic about regime change than most people I talk to. The key difference from Iraq is that the Iranian population has demonstrated repeatedly that they want change. You have these massive protests every few years. If you’re trying to convince a population that life could be better, that’s an easier trade in Iran than almost anywhere else in the region because a large majority of the population already believes it.
The modal outcome is probably some messy internal proxy conflict between the IRGC trying to hold on and US and Israeli-backed groups. But I think about the Egypt model after the Arab Spring: messy at first, then you get your guy in. That outcome seems more achievable in Iran than a lot of other US-led regime change efforts, precisely because the popular will is already there.
You’ve been talking about prediction markets as tools for hedging, not just trading. Can you explain that?
This is something I want to use Cheap Convexity to really hammer on. Right now, the only businesses that hedge energy prices are large corporations: airlines, energy companies. A small manufacturer with real exposure to oil prices has no practical way to hedge a tail scenario.
But functionally, a prediction market event contract is just an option on an event or a price level. If you’re a small business that gets badly hurt if oil goes to $120 but doesn’t really care whether it’s at $60 or $80, you can buy a contract that pays out at $120 for, say, a 5-7% premium. That’s exactly what Goldman Sachs would structure for a Fortune 500 client, just with more zeros. You don’t need to pay for markets to chop around in their normal range. You only want exposure at the tail, because that’s where you actually get hurt.
The same logic applies to currencies. I live in Israel and earn dollars. Dollar-shekel has moved about 20% in two years. That’s a meaningful change in my cost of living. I would pay a small premium to own the tail of that. Every real business has currency risk, interest rate risk, energy risk. None of them are solving for it at the small business level. Prediction markets are the obvious answer.
What’s the path to getting there?
It’s partly educational and partly just time. A 50 or 60-year-old business operator might look at this and think it’s a phase, the same way some people wrote off crypto early. But as younger people build businesses and realize this tool exists, I don’t see why it wouldn’t grow. It’s a function of awareness and time.
The market structure question is also important. You need retail flow first, then market makers follow. Once market makers are there, institutional risk-takers can come in at real size because the liquidity exists. The chicken-and-egg problem resolves itself, but retail has to come first.
What prediction markets would you most like to see added?
Non-Fed interest rates, especially the 10-year, because that’s the economy-sensitive rate most businesses actually borrow against. Longer-term currency pairs beyond the major dollar crosses, especially ones with high geopolitical sensitivity.
On energy specifically, I’d love to see more granular infrastructure contracts around LNG facility impairment and tanker availability, rather than just the binary open/closed Hormuz question. The area-under-the-curve problem needs better market expressions.
And honestly, five-minute oil markets. I know that sounds like pure gambling, but bootstrapping retail liquidity through short-duration products is how you eventually get to the institutional-sized hedging markets. You need the retail activity to attract the market makers. That’s how market structure develops.
Follow Jon Turek on X and read Cheap Convexity on Substack.
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